UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-20127

Escalon Medical Corp.

(Exact name of registrant as specified in its charter)

Pennsylvania		33-0272839
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Common Stock, par value $0.001		NASDAQ Capital Market
(Title of class)		(Name of each exchange
		on which registered)

     Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No þ

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filero		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

     The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on December 31, 2008 was approximately $11,967,023, computed by reference to the price at which the common equity was last sold on the NASDAQ Capital Market on such date.

     As of September 30, 2009, the registrant had 7,526,430 shares of common stock outstanding.

     Certain information required by Part III of this Annual Report on Form 10-K will be set forth in, and is incorporated by reference from, the registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders.

 

 

Escalon Medical Corp.
Annual Report on Form 10-K
For the Fiscal Year Ended June 30, 2009

TABLE OF CONTENTS

		Page
PART I
Item 1. Business			1
Item 1A. Risk Factors			7
Item 1B. Unresolved Staff Comments			15
Item 2. Properties			15
Item 3. Legal Proceedings			16
Item 4. Submission of Matters to a Vote of Security Holders			16
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			16
Item 6. Selected Financial Data			17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			38
Item 8. Financial Statements and Supplementary Data			39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			72
Item 9A. Controls and Procedures
Item 9A(T). Controls and Procedures			72
Item 9B. Other Information			73
PART III
Item 10. Directors, Executive Officers and Corporate Governance			73
Item 11. Executive Compensation			74
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			74
Item 13. Certain Relationships and Related Transactions, and Director Independence			74
Item 14. Principal Accounting Fees and Services			74
PART IV
Item 15. Exhibits, Financial Statement Schedules			74

PART 1

ITEM 1. BUSINESS

Company Overview

          Escalon Medical Corp. (“Escalon” or the “Company”) is a Pennsylvania corporation initially incorporated in California in 1987 and reincorporated in Pennsylvania in November 2001. Within this document, the “Company” collectively shall mean Escalon and its wholly owned subsidiaries: Sonomed, Inc. (“Sonomed”), Escalon Vascular Access, Inc. (“Vascular”), Escalon Medical Europe GmbH (“EME”), Escalon Digital Vision, Inc. (“EMI”), Escalon Pharmaceutical, Inc. (“Pharmaceutical”), Escalon Holdings, Inc. (“EHI”), Escalon IP Holdings, Inc., Escalon Vascular IP Holdings, Inc., Sonomed IP Holdings, Inc., Drew Scientific Holdings, Inc. and Drew Scientific Group, Plc (“Drew”) and its subsidiaries.

          The Company operates in the healthcare market specializing in the development, manufacture, marketing and distribution of medical devices and pharmaceuticals in the areas of ophthalmology, diabetes, hematology and vascular access. The Company and its products are subject to regulation and inspection by the United States Food and Drug Administration (the “FDA”). The FDA and other governmental authorities require extensive testing of new products prior to sale and have jurisdiction over the safety, efficacy and manufacture of products, as well as product labeling and marketing. The Company’s Internet address is www.escalonmed.com.

          Drew Business

          Drew is a diagnostics company specializing in the design, manufacture and distribution of instruments for blood cell counting and blood analysis. Drew is focused on providing instrumentation and consumables for the physician office and veterinary office laboratories. Drew also supplies the reagent and other consumable materials needed to operate the instruments. Drew acquired JAS Diagnostics, Inc. (“JAS”) on May 29, 2008. JAS was established in 2000 and specializes in the manufacture of a broad range of liquid stable, diagnostics chemistry reagents used in IVD tests. Many of these reagents are single vial stable, which offer ease of use, increased speed of results and extended on-board stability. Drew acquired certain assets of Biocode Hycel on December 31, 2008. Biocode Hycel specializes in the hematology consumables for the physician office and veterinary office laboratories. The operating results of JAS and Biocode Hycel are included as part of the Drew business segment as of May 29, 2008 and December 31, 2008, respectively.

          Diabetes Testing

          Drew sells two diabetic testing products: the DS5 and the Hb-Gold. The DS5 instrument, dispenser and associated reagent kit measure long-term glucose control in diabetic patients. The system’s small size and ease of use make it ideal for main laboratory, clinic or satellite laboratory settings. The Hb-Gold instrument and associated reagent kit provides for the in vitro measurement of certain genetic diseases of the blood. In the United States, this instrument is available for research only.

          Hematology

          Drew offers a broad array of equipment for use in the field of human and veterinary hematology. Drew’s Excell product lines are for use in the field of human hematology, whereas the Hemavet product line is for use in the veterinary field. The acquisition of Biocode Hycel added proprietary hematology reagents to the Drew hematology reagent portfolio of products.

          Sonomed Business

          Sonomed develops, manufactures and markets ultrasound systems for diagnostic or biometric applications in ophthalmology. The systems are of four types: A-Scans, B-Scans, High Frequency B-Scans (“UBMs”) and pachymeters.

          A-Scans

          The A-Scan provides information about the internal structure of the eye by sending a beam of ultrasound along a fixed axis through the eye and displaying the various echoes reflected from the surfaces intersected by the beam. The principal echoes occur at the cornea, both surfaces of the lens and the retina. The system displays the position and magnitudes of the echoes on an electronic display. The A-Scan also includes software for measuring distances within the eye. This information is primarily used to calculate lens power for implants.

          B-Scans

          The B-Scan is primarily a diagnostic tool that supplies information to physicians where the media within the eye are cloudy or opaque. Whereas physicians normally use light, which cannot pass through such media, the ultrasound beam is capable of passing through the opacity and displaying an image of the internal structures of the eye. Unlike the A-Scan, the B-Scan transducer is not in a fixed position; it swings through a 60 degree sector to provide a two-dimensional image of the eye.

          UBM

          The UBM is a high frequency/high resolution ultrasound device, designed to provide highly detailed information of the anterior segment of the eye. The UBM is used for glaucoma evaluation, tumor evaluation and differentiation, pre and post-intraocular lens implantation and corneal refractive surgery. The device allows the surgeons to do precise measurements within the anterior chamber of the eye.

          Pachymeters

          The pachymeter uses the same principles as the A-Scan, but the system is tailored to measure the thickness of the cornea. With the advent of refractive surgery (where the cornea is actually cut and reshaped) this measurement has become critical. Surgeons must know the precise thickness of the cornea so as to set the blade to make a cut of approximately 20% of the thickness of the cornea.

          Vascular Business

          Vascular develops, manufactures and markets vascular access products. These products are Doppler-guided vascular access assemblies used to locate desired vessels for access. Primary specialty groups that use the device are cardiac catheterization labs and interventional radiologists. The Company’s vascular products include the PD Access™ and SmartNeedle™ lines of monitors, Doppler-guided bare needles and Doppler-guided infusion needles.

          PD Access™ and SmartNeedle™ Monitors, Needles and Catheter Products

          These devices detect blood flow using Doppler ultrasound technology and differentiate between a venous and arterial vessel. The devices utilize a miniature Doppler ultrasound probe that is positioned within the lumen of a vascular access needle. When a Doppler-guided needle pierces the skin of a patient, the probe and monitor can determine if the user is approaching an artery or vein, guiding them to a successful vascular access.

          VascuView Visual Ultrasound System

          This device provides a two dimensional B-Scan image of the vasculature of a patient, thereby allowing a user to visually guide a needle to the desired artery or vein access. Vascular provides periphery consumable products to maintain a sterile field when using the device.

          EMI Business

          EMI markets a CFA (Color/Fluorescein Angiography) digital imaging system, designed specifically for ophthalmology. This diagnostic tool, ideal for use in detecting retinal problems in diabetic and elderly patients, provides a high-resolution image, far superior to conventional film in image quality, processing and capture. The instant image display provides users with the necessary clinical information that allows treatment to be performed while the patient is still in the physician’s office.

          Medical/Trek Business

          Medical/Trek manufactures and distributes the following ophthalmic surgical products under the Company’s and/or Trek Medical Product’s names. Vitreoretinal ophthalmic surgeons primarily utilize these products.

          Ispan Intraocular Gases

          The Company distributes two intraocular gas products C3F8 and SF6, which are used by vitreoretinal surgeons as a temporary tamponade in detached retina surgery. Under a non-exclusive distribution agreement with Scott Medical Products (“Scott”), the Company distributes packages of Scott gases in canisters containing up to 25 grams of gas. Along with the intraocular gases, the Company manufactures and distributes a patented disposable universal gas kit, which delivers the gas from the canister to the patient.

          Viscous Fluid Transfer Systems

          The Company markets viscous fluid transfer systems and related disposable syringe products, which aid surgeons in the process of injecting and extracting Silicone Oil. Adjustable pressures and vacuums provided by the equipment allow surgeons to manipulate the flow of Silicone Oil during surgery.

          Fiber Optic Light Sources

          Light source and fiber optic products are widely used by vitreoretinal surgeons during surgery. The Company offers surgeons a complete line of light sources along with a variety of fiber optic probes and illuminated tissue manipulators.

Research and Development

          The Company conducts development of medical devices for the diagnosis and monitoring of medical disorders in the areas of diabetes, cardiovascular diseases and hematology at the Company’s Dallas, Texas, Miami, Florida and Rennes, France facilities. The Company conducts medical device and vascular access product development at its New Berlin, Wisconsin facility. The development of ultrasound ophthalmic equipment is performed at the Company’s Lake Success, New York facility on Long Island. Company-sponsored research and development expenditures for the fiscal years ended June 30, 2009, 2008 and 2007 were approximately $3,475,000, $4,058,000, and $3,461,000, respectively.

Manufacturing and Distribution

          The Company leases an aggregate of approximately 71,750 square feet of space at its facilities in Texas, Connecticut, France and the United Kingdom and Miami, Florida. These sites are currently used for engineering, product design and development and product assembly. All of the Company’s medical devices and consumables for the diagnosis and monitoring of medical disorders in the areas of diabetes, cardiovascular diseases and hematology are distributed from the Company’s Dallas, Texas, Oxford, Connecticut, Miami, Florida, Rennes, France, and Barrow-in-Furness, United Kingdom facilities. See “Business Conditions” in “Management’s Discussion and Analysis of Financial Condition of Results of Operations” for additional information.

          The Company leases approximately 11,200 square feet of space in Wisconsin, for its surgical products and vascular access operations. The facility is currently used for engineering, product design and development, manufacturing and product assembly. The Company also leases approximately 2,500 square feet in Lawrence, Massachusetts used primarily for product design and development in the EMI business unit. The Company subcontracts component manufacture, assembly and sterilization to various vendors. The New Berlin manufacturing facility includes a class 10,000 clean room. A class 10,000 clean room is a controlled environment for producing devices while avoiding any significant contaminants. The cleanliness provided by the clean room exceeds the requirements of the FDA. The Company’s ophthalmic surgical products and vascular access products are distributed from the Company’s Wisconsin facility.

          The Company designs, develops and services its ultrasound ophthalmic products at its approximately 12,200 square foot facility in Lake Success, New York. The Company has achieved ISO13485 certification at all of its manufacturing facilities for all medical devices, ultrasound devices and consumables the Company produces. ISO13845 requires an implemented quality system that applies to product design. These certifications can be obtained only after a complete audit of a company’s quality system by an independent outside auditor. These certifications require that facilities undergo periodic reexamination. The Company has obtained European Community certification (“CE”) for disposable delivery systems, fiber optic light probes, medical devices and consumables for the diagnosis and monitoring of medical disorders in the areas of diabetes, cardiovascular diseases and hematology, vascular access products and certain ultrasound models.

          The manufacture, testing and marketing of each of the Company’s products entails risk of product liability. Product liability insurance is carried by the Company to cover primary risk.

Governmental Regulations

          The Company’s products are subject to stringent ongoing regulation by the FDA and similar health authorities, and if these governmental approvals or clearances of the Company’s products are restricted or revoked, the Company could face delays that would impair the Company’s ability to generate funds from operations.

          The Company has received the necessary FDA clearances and approvals for all products that the Company currently markets. The FDA and comparable agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the manufacturing and marketing of pharmaceutical and medical device equipment and related disposables, including the obligation to adhere to the FDA’s Good Manufacturing Practice regulations. Compliance with these regulations requires time-consuming detailed validation of manufacturing and quality control practices, FDA periodic inspections and other procedures. If the FDA finds any deficiencies in the validation processes, for example, the FDA may impose restrictions on marketing the specific products until such deficiencies are corrected.

          Drew received a warning letter from the FDA in April 2007 that certain deficiencies were noted during the FDA’s audit of the Company’s United Kingdom facility. Drew has addressed the deficiencies and has brought the facility into compliance with FDA regulations. As such, the FDA notified Drew in June 2007 that the actions taken were deemed sufficient and would be verified during the next inspection. No further issues have been raised since that time.

          The FDA and similar health authorities in foreign countries extensively regulate the Company’s activities. The Company must obtain either 510(K) clearances or pre-market approvals and new drug application approvals prior to marketing a product in the United States. Foreign regulation also requires that the Company obtain other approvals from foreign government agencies prior to the sale of products in those countries. Also, the Company may be required to obtain FDA clearance or approval before exporting a product or device that has not received FDA marketing clearance or approval.

          The Company has received CE approval on several of the Company’s products that allows the Company to sell the products in the countries comprising the European Community. In addition to the CE mark, however, some foreign countries require separate individual foreign regulatory clearances.

Marketing and Sales

          The Drew business segment sells its products through internal sales and marketing employees located in the United States, France and in the United Kingdom as well as through a large network of distributors, both domestic and international.

          The Sonomed product line is sold through internal sales employees as well as independent sales representatives located in the United States and Europe, to a large network of distributors and directly to medical institutions.

          Vascular business segment products are marketed domestically through internal sales and marketing employees located in the United States as well as through an independent sales representative in Europe and a network of domestic and foreign distributors that are managed by the Company’s sales team.

          The Medical/Trek and EMI business segments sell their ophthalmic devices and instruments directly to end users through internal sales and marketing employees located at the Company’s Wisconsin and Massachusetts facilities. Sales are primarily made to teaching institutions, key hospitals and eye surgery centers, focusing primarily on physicians and operating room personnel performing vitreoretinal surgery. The EMI product line is sold through internal sales employees and independent sales representatives in the United States.

Service and Support

          The Company maintains a full-service program for all products sold. The Company provides limited warranties on all products against defects and performance. Product repairs are made at the Wisconsin facility for surgical devices, vascular access products and EMI devices. Sonomed’s products are serviced at the Company’s New York facility. Drew’s products are serviced at its Dallas, Texas and Barrow-in-Furness, UK facilities.

Patents, Trademarks and Licenses

          The pharmaceutical and medical device communities place considerable importance on obtaining patent and trade secret protection for new technologies, products and processes for the purpose of strengthening the Company’s position in the market place and protecting the Company’s economic interests. The Company’s policy is to protect its technology by aggressively obtaining patent protection for substantially all of its developments and products, both in the United States and in selected countries outside the United States. It is the Company’s policy to file for patent protection in those foreign countries in which the Company believes such protection is necessary to protect its economic interests. The duration of the Company’s patents, trademarks and licenses vary through 2020. The Company has 21 United States patents and 31 patents issued abroad that cover the Company’s surgical products and pharmaceutical technology. Drew has approximately 72 patents related to its technology.

          With respect to the Company’s ultrafast laser technology, licensed to Intralase Corp. “Intralase”, 16 patents have been issued in the United States and 11 overseas. In 1997, Intralase and Escalon entered into an agreement under which Intralase became the exclusive licensee of these patents, technology and intellectual property owned by the Company, which agreement was amended and restated in October 2000. On February 27, 2008, the Company settled all outstanding disputes and litigation with Intralase pursuant to which the Company transferred to Intralase its ownership of all patents and intellectual property formally licensed to Intralase, the license agreement was terminated, and Intralase made a lump-sum payment to the Company of $9,600,000.

          The Company intends to vigorously defend its patents if the need arises.

          While in the aggregate the Company’s patents are of material importance to its business taken as a whole, the patents, trademarks and licenses that are the most critical to the Company’s ability to generate revenues are the following:

	•		The Escalon trademark is due for renewal on January 19, 2013, and the Company intends to renew the trademark. The Sonomed trademark was renewed in November 2006.
	•		In the Vascular business unit, the Company has two patents that are of material importance. The first patent is an apparatus for the cannulation of blood vessels. This patent will expire on February 23, 2011. The second patent is also an apparatus for the cannulation of blood vessels. This patent expired on January 11, 2009. The Vascular segment has also one patent application pending for the cannulation of blood vessels with a hypodermic needle.

Competition

          There are numerous direct and indirect competitors of the Company in the United States and abroad. These competitors include ophthalmic-oriented companies that market a broad portfolio of products including prescription ophthalmic pharmaceuticals, ophthalmic devices, consumer products (such as contact lens cleaning solution) and other eye care products; large integrated pharmaceutical companies that market a limited number of ophthalmic pharmaceuticals in addition to many other pharmaceuticals; and smaller specialty pharmaceutical and biotechnology companies that are engaged in the development and commercialization of prescription ophthalmic pharmaceuticals and products and, to some extent, drug delivery systems. The Company’s competitors for medical devices and ophthalmic pharmaceuticals include, but are not limited to, Bausch & Lomb, Inc., Alcon Laboratories, Inc., Paradigm Medical, Inc., Quantel, Inc. and Accutome, Inc.

          Several large companies dominate the ophthalmic market, with the balance of the industry being highly fragmented. The Company believes that these large companies capture approximately 85% of the overall ophthalmic market. The balance of the market is comprised of smaller companies ranging from start-up entities to established market players. The ophthalmic market in general is intensely competitive, with each company eager to expand its market share. The Company’s strategy is to compete primarily on the basis of technological innovation to which it has proprietary rights. The Company believes, therefore, that its success will depend in large part on protecting its intellectual property through patents and other governmental regulations.

          Sonomed’s principal competitors are Alcon Laboratories, Inc, Quantel, Inc. and Accutome, Inc. Sonomed has had a leading presence in the ophthalmic ultrasound industry for over 30 years. Management believes that this has helped Sonomed build a reputation as a long-standing operation that provides a quality product, which has enabled the Company to establish effective distribution coverage within the United States market. Various competitors offering similar products at a lower price could threaten Sonomed’s market position. The development of laser technologies for ophthalmic biometrics and imaging may also diminish the Company’s market position. This equipment can be used instead of ultrasound equipment in most, but not all, patients. Such equipment, however, is more expensive.

          The Medical/Trek and EMI businesses sell a broad range of ophthalmic surgical and diagnostic products. The more significant products are ISPAN^® gases and delivery systems. Medical/Trek and EMI also manufacture various ophthalmic surgical products for major ophthalmic companies to be sold under their names. To remain competitive, the Company needs to maintain a low-cost operation. There are numerous other companies that can provide this manufacturing service. There are a variety of other devices that directly compete with the camera back marketed by EMI.

          The Vascular access product line is comprised of disposable devices, and currently Vascular has no direct competition. However, a significantly higher priced non-disposable device that facilitates vascular access is currently being marketed. Vascular produces the only device that can be accommodated within a standard needle for assisting medical practitioners in gaining access to a vessel in the human

vascular system. There are no similar devices on the market that enable medical practitioners to gain access using their normal procedures. The only similar product utilizes a separate ultrasound monitor, but no disposables are utilized. When using the competing device, medical practitioners need to look at the monitor while advancing the needle into the patient. The perceived disadvantage of the Company’s vascular product is that the retail price is substantially greater than the cost of a traditional needle.

          Drew is a diagnostics company specializing in the design, manufacture and distribution of instruments for blood cell counting and blood analysis. Drew is focused on the market for the physician office and veterinary office laboratories. Drew’s principal competition is Beckman Coulter and Bayer Diagnostics in the human market and IDDEX in the veterinary market. Currently Drew has only a nominal share of these markets, and the Company will seek to increase Drew’s market share. The Company’s strategy is to market instruments and consumables that are competitive for the low volume users in the domestic and overseas markets. Drew’s success will depend on its ability to enhance its current product range and control its production costs. Drew recognizes that other companies may adopt similar strategies which could hinder Drew’s ability to increase market share.

Human Resources

          As of June 30, 2009, the Company employed 183 full-time employees and 4 part-time employees. Of these employees, 95 of the Company’s employees are employed in manufacturing, 50 are employed in general and administrative positions, 22 are employed in sales and marketing and 12 are employed in research and development. The Company’s employees are not covered by a collective bargaining agreement, and the Company considers its relationship with its employees to be good.

ITEM 1A. RISK FACTORS

Cautionary Factors That May Affect Future Results

          Certain statements contained in, or incorporated by reference in, this report are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “should,” “will,” “would,” “seek,” and similar words or expressions. The Company’s forward-looking statements include certain information relating to general business strategy, growth strategies, financial results, liquidity, product development, the introduction of new products, the enhancement of existing products, the potential markets and uses for the Company’s products, the Company’s regulatory filings with the FDA, acquisitions, the development of joint venture opportunities, intellectual property and patent protection and infringement, the loss of revenue due to the expiration on termination of certain agreements, the effect of competition on the structure of the markets in which the Company competes, increased legal, accounting and Sarbanes-Oxley compliance costs, defending the Company in litigation matters and the Company’s cost-saving initiatives. The reader must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by assumptions that fail to materialize as anticipated. Consequently, no forward-looking statement can be guaranteed, and actual results may vary materially. It is not possible to foresee or identify all factors affecting the Company’s forward-looking statements, and the reader therefore should not consider the following list of such factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions.

          The Company cautions the reader to consider carefully these factors as well as the specific factors discussed with each specific forward-looking statement in this Form 10-K annual report and in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). In some cases, these factors have impacted, and in the future (together with other unknown factors) could impact, the Company’s ability to implement the Company’s business strategy and may cause actual results to differ materially from those contemplated by such forward-looking statements. Any expectation, estimate or projection contained in a forward-looking statement may not be achieved.

          The Company also cautions the reader that forward-looking statements speak only as of the date made. The Company undertakes no obligation to update any forward-looking statement, but investors are advised to consult any further disclosures by the Company on this subject in the Company’s filings with the SEC. Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the Company’s forward-looking statements, the material factors include, without limitation, the following:

          Due to our history of operating losses, our auditors are uncertain that we will be able to continue as a going concern.

          The financial statements have been prepared assuming that the Company will continue as a going concern. The independent auditors’ report issued in conjunction with the financial statements for the year ended June 30, 2009 contains an explanatory paragraph indicating that certain matters (see page 46) raise substantial doubt about our ability to continue as a going concern. The Company cannot guarantee that it can generate net income, increase revenues or successfully expand its operation in the future, and if it cannot do so, the company may not be able to survive and any investment in the company may be lost.

     We believe that our existing cash and cash flow from operations will be sufficient to fund our activities throughout fiscal 2010, however, we have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in “Risk Factors.”

          Because our auditors have expressed a going concern opinion, our ability to obtain additional financing could be adversely affected.

     Because of continued losses, negative cash flows from operating activities and new debt payments, the Company has included going concern disclosure in Note 1 to its financial statements included in this report, addressing substantial doubt about the Company’s ability to continue as a going concern. This going concern disclosure could adversely affect the Company’s ability to obtain favorable financing terms in the future or to obtain any additional financing if needed. If we do proceed with raising funds in the future, we may be required to raise those funds through public or private financings, strategic relationships or other arrangements. The sale of additional equity and debt securities may result in additional dilution to our stockholders. Additional financing may not be available in amounts or on terms acceptable to us or at all.

          Any acquisitions, strategic alliances, joint ventures and divestitures that the Company effects could result in financial results that differ from market expectations.

          In the normal course of business, the Company engages in discussions with third parties regarding possible acquisitions, strategic alliances, joint ventures and divestitures. As a result of any such transactions, the Company’s financial results may differ from the investment community’s expectations in a given quarter. In addition, acquisitions and alliances may require the Company to integrate a different company culture, management team, business infrastructure, accounting systems and financial reporting systems. The Company may not be able to effect any such acquisitions or alliances. The Company may have difficulty developing, manufacturing and marketing the products of a newly acquired business in a way that enhances the performance of the Company’s combined businesses or product lines to realize the value from any expected synergies. Depending on the size and complexity of an acquisition, the Company’s successful integration of the entity depends on a variety of factors, including the retention of key employees and the management of facilities and employees in separate geographical areas. These efforts require varying levels of management resources, which may divert the Company’s attention from other business operations. The Company acquired Drew during the first quarter of fiscal 2005. Drew does

not have a history of producing positive operating cash flows and, as a result, at the time of acquisition, was operating under financial constraints and was under-capitalized and has continued to negatively impact the Company’s financial results. As Drew is integrated into the Company, management continues to work to reverse the situation, while at the same time seeking to strengthen Drew’s market position. The Company loaned approximately $29 million to Drew. The funds have been primarily used to procure components to build up inventory to support the manufacturing process, to pay off accounts payable and debt of Drew, and to expand the sales and marketing and research and development efforts, to fund new product development and underwrite operating losses since its acquisition. The Company cannot rule out that further working capital will be required by Drew. If the Company does not realize the expected benefits or synergies of such transactions, the Company’s consolidated financial position, results of operations and stock price could be negatively impacted. Also, the Company’s results may be adversely impacted because of acquisition-related costs, amortization costs for certain intangible assets and impairment losses related to goodwill in connection with such transactions. Finally, acquisitions or alliances by the Company may not occur, which could impair the Company’s growth.

          The Company’s results fluctuate from quarter to quarter.

          The Company has experienced quarterly fluctuations in operating results and anticipates continued fluctuations in the future. A number of factors contribute to these fluctuations:

	•		Acquisitions, such as Drew, JAS and Biocode Hycel and subsequent integration of the acquired company, although such acquisitions may not occur;
	•		The timing and expense of new product introductions by the Company or its competitors, although the Company might not successfully develop new products and any such new products may not gain market acceptance;
	•		The cancellation or delays in the purchase of the Company’s products;
	•		Fluctuations in customer demand for the Company’s products;
	•		Fluctuations in royalty income;
	•		The gain or loss of significant customers;
	•		Changes in the mix of products sold by the Company;
	•		Competitive pressures on prices at which the Company can sell its products;
	•		Announcements of new strategic relationships by the Company or its competitors;
	•		Litigation costs and settlements; and
	•		General economic conditions and other external factors such as energy costs.

          The Company sets its spending levels in advance of each quarter based, in part, on the Company’s expectations of product orders and shipments during that quarter. A shortfall in revenue, therefore, in any particular quarter as compared to the Company’s plan could have a material adverse impact on the Company’s results of operations and cash flows. Also, the Company’s quarterly results could fluctuate due to general market conditions in the healthcare industry or global economy generally, or market volatility unrelated to the Company’s business and operating results.

          The Company’s cost saving initiatives may not be effective.

          The Company has implemented cost-saving initiatives that may not be effective in returning the Company to profitability. If these initiatives are insufficient, additional measures may be necessary.

          Failure of the market to accept the Company’s products could adversely impact the Company’s business and financial condition.

          The Company’s business and financial condition will depend in part upon the market acceptance of the Company’s products. The Company’s products may not achieve market acceptance. Market acceptance depends on a number of factors including:

	•		The price of the products;
	•		The continued receipt of regulatory approvals for multiple indications;
	•		The establishment and demonstration of the clinical safety and efficacy of the Company’s products; and
	•		The advantages of the Company’s products over those marketed by the Company’s competitors.

          Any failure to achieve significant market acceptance of the Company’s products will have a material adverse impact on the Company’s business.

          The Company’s products are subject to stringent ongoing regulation by the FDA and similar health care regulatory authorities, and if the FDA’s approvals or clearances of the Company’s products are restricted or revoked, the Company could face delays that would impair the Company’s ability to generate funds from operations.

          The FDA and similar health care regulatory authorities in foreign countries extensively regulate the Company’s activities. The Company must obtain either 510(K) clearances or pre-market approvals and new drug application approvals prior to marketing any products in the United States. Foreign regulation also requires that the Company obtain other approvals from foreign government agencies prior to the sale of products in those countries. Also, the Company may be required to obtain FDA approval before exporting a product or device that has not received FDA marketing clearance or approval.

          The Company has received the necessary FDA approvals for all products that the Company currently markets in the United States. Any restrictions on or revocation of the FDA approvals and clearances that the Company has obtained, however, would prevent the continued marketing of the impacted products and other devices. The restrictions or revocations could result from the discovery of previously unknown problems with the product. Consequently, FDA revocation would impair the Company’s ability to generate funds from operations.

          The FDA and comparable agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the manufacturing and marketing of pharmaceutical and medical device equipment and related disposables, including the obligation to adhere to the FDA’s Good Manufacturing Practice regulations. Compliance with these regulations requires time-consuming detailed validation of manufacturing and quality control processes, FDA periodic inspections and other procedures. If the FDA finds any deficiencies in the validation processes, for example, the FDA may impose restrictions on marketing the specific products until such deficiencies are corrected.

          The Company has received CE approval on several of the Company’s products that allows the Company to sell the products in the countries comprising the European Community. In addition to the CE mark, however, some foreign countries may require separate individual foreign regulatory clearances. The Company may not be able to obtain regulatory clearances for other products in the United States or foreign markets.

          The process for obtaining regulatory clearances and approvals underlying clinical studies for any new products or devices and for multiple indications for existing products is lengthy and will require substantial commitments of Company’s financial resources and Company’s management’s time and effort. Any delay in obtaining clearances or approvals or any changes in existing regulatory requirements would materially adversely impact the Company’s business.

          The Company’s failure to comply with the applicable regulations would subject the Company to fines, delays or suspensions of approvals or clearances, seizures or recalls of products, operating restrictions, injunctions or civil or criminal penalties, which would adversely impact the Company’s business, financial condition and results of operations.

          The success of competitive products could have an adverse impact on the Company’s business.

          The Company faces intense competition in the medical device and pharmaceutical markets, which are characterized by rapidly changing technology, short product life cycles, cyclical oversupply and rapid price erosion. Many of the Company’s competitors have substantially greater financial, technical, marketing, distribution and other resources. The Company’s strategy is to compete primarily on the basis of technological innovation, reliability, quality and price of the Company’s products. Without timely introductions of new products and enhancements, the Company’s products will become technologically obsolete over time, in which case the Company’s revenues and operating results would suffer. The success of the Company’s new product offerings will depend on several factors, including the Company’s ability to:

	•		Properly identify customer needs;
	•		Innovate and develop new technologies, services and applications;
	•		Establish adequate product distribution coverage;
	•		Obtain and maintain required regulatory approvals from the FDA and other regulatory agencies;
	•		Protect the Company’s intellectual property;
	•		Successfully commercialize new technologies in a timely manner;
	•		Manufacture and deliver the Company’s products in sufficient volumes on time;
	•		Differentiate the Company’s offerings from the offerings of the Company’s competitors;
	•		Price the Company’s products competitively;
	•		Anticipate competitors’ announcements of new products, services or technological innovations; and
	•		Anticipate general market and economic conditions.

          The Company may not be able to compete effectively in the competitive environments in which the Company operates.

          The Company’s products employ proprietary technology, and this technology may infringe on the intellectual property rights of third parties.

          The Company holds several United States and foreign patents for the Company’s products. Other parties, however, hold patents relating to similar products and technologies. If patents held by others were adjudged valid and interpreted broadly in an adversarial proceeding, the court or agency could deem them to cover one or more aspects of the Company’s products or procedures. Any claims for patent infringements or claims by the Company for patent enforcement would consume time, result in costly litigation, divert technical and management personnel or require the Company to develop non-infringing technology or enter into royalty or licensing agreements. The Company may become subject to one or more claims for patent infringement. The Company may not prevail in any such action, and the Company’s patents may not afford protection against competitors with similar technology.

          If a court determines that any of the Company’s products infringes, directly or indirectly, on a patent in a particular market, the court may enjoin the Company from making, using or selling the product. Furthermore, the Company may be required to pay damages or obtain a royalty-bearing license, if available, on acceptable terms.

          Lack of availability of key system components could result in delays, increased costs or costly redesign of the Company’s products.

          Although some of the parts and components used to manufacture the Company’s products are available from multiple sources, the Company currently purchases most of the Company’s components from single sources in an effort to obtain volume discounts. Lack of availability of any of these parts and components could result in production delays, increased costs or costly redesign of the Company’s products. Any loss of availability of an essential component could result in a material adverse change to

the Company’s business, financial condition and results of operations. Some of the Company’s suppliers are subject to the FDA’s Good Manufacturing Practice regulations. Failure of these suppliers to comply with these regulations could result in the delay or limitation of the supply of parts or components to the Company, which would adversely impact the Company’s financial condition and results of operations.

          The Company’s ability to market or sell the Company’s products may be adversely impacted by limitations on reimbursements by government programs, private insurance plans and other third party payors.

          The Company’s customers bill various third party payors, including government programs and private insurance plans, for the health care services provided to their patients. Third party payors may reimburse the customer, usually at a fixed rate based on the procedure performed, or may deny reimbursement if they determine that the use of the Company’s products was elective, unnecessary, inappropriate, not cost-effective, experimental or used for a non-approved indication. Third party payors may deny reimbursement notwithstanding FDA approval or clearance of a product and may challenge the prices charged for the medical products and services. The Company’s ability to sell the Company’s products on a profitable basis may be adversely impacted by denials of reimbursement or limitations on reimbursement, compared with reimbursement available for competitive products and procedures. New legislation that further reduces reimbursements under the capital cost pass-through system utilized in connection with the Medicare program could also adversely impact the marketing of the Company’s products.

          Future legislation or changes in government programs may adversely impact the market for the Company’s products.

          From time to time, the federal government and Congress have made proposals to change aspects of the delivery and financing of health care services. The Company cannot predict what form any future legislation may take or its impact on the Company’s business. Legislation that sets price limits and utilization controls adversely impact the rate of growth of the markets in which the Company participates. If any future health care legislation were to adversely impact those markets, the Company’s product marketing could also suffer, which would adversely impact the Company’s business.

          The Company may become involved in product liability litigation, which may subject the Company to liability and divert management attention.

          The testing and marketing of the Company’s products entails an inherent risk of product liability, resulting in claims based upon injuries or alleged injuries or a failure to diagnose associated with a product defect. Some of these injuries may not become evident for a number of years. Although the Company is not currently involved in any product liability litigation, the Company may be party to litigation in the future as a result of an alleged claim. Litigation, regardless of the merits of the claim or outcome, could consume a great deal of the Company’s time and attention away from the Company’s core businesses. The Company maintains limited product liability insurance coverage of $1,000,000 per occurrence and $2,000,000 in the aggregate, with umbrella policy coverage of $5,000,000 in excess of such amounts. A successful product liability claim in excess of any insurance coverage may adversely impact the Company’s financial condition and results of operations. The Company’s product liability insurance coverage may not continue to be available to the Company in the future on reasonable terms or at all.

          The Company’s international operations could be adversely impacted by changes in laws or policies of foreign governmental agencies and social and economic conditions in the countries in which the Company operates.

          The Company derives a portion of its revenue from sales outside the United States. Changes in the laws or policies of governmental agencies, as well as social and economic conditions, in the countries in which the Company operates could impact the Company’s business in these countries and the Company’s results of operations. Also, economic factors, including inflation and fluctuations in interest rates and foreign currency exchange rates, and competitive factors such as price competition, business combinations

of competitors or a decline in industry sales from continued economic weakness, both in the United States and other countries in which the Company conducts business, could adversely impact the Company’s results of operations.

          The Company is dependent on its management and key personnel to succeed.

          The Company’s principal executive officers and technical personnel have extensive experience with the Company’s products, the Company’s research and development efforts, the development of marketing and sales programs and the necessary support services to be provided to the Company’s customers. Also, the Company competes with other companies, universities, research entities and other organizations to attract and retain qualified personnel. The loss of the services of any of the Company’s executive officers or other technical personnel, or the Company’s failure to attract and retain other skilled and experienced personnel, could have a material adverse impact on the Company’s ability to maintain or expand businesses.

          The market price of the Company’s stock has historically been volatile, and the Company has not paid cash dividends.

          The volatility of the Company’s common stock imposes a greater risk of capital losses on shareholders as compared to less volatile stocks. In addition, such volatility makes it difficult to ascribe a stable valuation to a shareholder’s holdings of the Company’s common stock. The following factors have and may continue to have a significant impact on the market price of the Company’s common stock:

	•		Acquisitions, strategic alliances, joint ventures and divestitures that the Company effects, if any;
	•		Announcements of technological innovations;
	•		Changes in marketing, product pricing and sales strategies or new products by the Company’s competitors;
	•		Changes in domestic or foreign governmental regulations or regulatory requirements; and
	•		Developments or disputes relating to patent or proprietary rights and public concern as to the safety and efficacy of the procedures for which the Company’s products are used.

          Moreover, the possibility exists that the stock market, and in particular the securities of technology companies such as the Company, could experience extreme price and volume fluctuations unrelated to operating performance.

          The Company has not paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future.

          The impact of terrorism or acts of war could have a material adverse impact on the Company’s business.

          Terrorist acts or acts of war, whether in the United States or abroad, could cause damage or disruption to the Company’s operations, its suppliers, channels to market or customers, or could cause costs to increase, or create political or economic instability, any of which could have a material adverse impact on the Company’s business.

          The Company’s charter documents and Pennsylvania law may inhibit a takeover.

          Certain provisions of Pennsylvania law and the Company’s Bylaws could delay or impede the removal of incumbent directors and could make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of the Company. These provisions could limit the share price that certain investors might be willing to pay in the future for shares of the Company’s common stock. The Company’s Board of Directors is divided into three classes, with directors in each class elected for three-year terms. The Bylaws impose various procedural and other requirements that could make it more difficult for shareholders to effect certain corporate actions. The Company’s Board of Directors may issue shares of preferred stock without shareholder approval on such terms and conditions, and having such

rights, privileges and preferences, as the Board may determine. The rights of the holders of common stock will be subject to, and may be adversely impacted by, the rights of the holders of any preferred stock that may be issued in the future. The Company has no current plans to issue any shares of preferred stock.

          There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with United States GAAP. Any changes in estimates, judgments and assumptions used could have a material adverse effect on the Company’s business, financial position and operating results.

          The consolidated financial statements included in the periodic reports the Company files with the SEC are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of financial statements in accordance with GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses and income. This includes estimates, judgments and assumptions for assessing the recoverability of the Company’s goodwill and other intangible assets, pursuant to Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. If any estimates, judgments or assumptions change in the future, the Company may be required to record additional expenses or impairment charges. Any resulting expense or impairment loss would be recorded as a charge against our earnings and could have a material adverse impact on our financial condition and operating results. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets (including goodwill and other intangible assets), liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on the Company’s financial position and operating results.

          On an on-going basis, the Company evaluates its estimates, including, among others, those relating to:

	•		product returns;
	•		allowances for doubtful accounts;
	•		inventories and related reserves;
	•		intangible assets and goodwill;
	•		income and other tax accruals;
	•		deferred tax asset valuation allowances;
	•		discounts and allowances;
	•		warranty obligations; and
	•		contingencies and litigation.

          The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s assumptions and estimates may, however, prove to have been incorrect and the Company’s actual results may differ from these estimates under different assumptions or conditions. While the Company believes the assumptions and estimates it makes are reasonable, any changes to the Company’s assumptions or estimates, or any actual results which differ from the Company’s assumptions or estimates, could have a material adverse effect on the Company’s financial position and operating results.

          The Company will be exposed to risks relating to evaluations of internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002.

          The Company anticipates spending a substantial amount of management time and resources to comply with changing laws, rules, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and regulations promulgated by the SEC.

          Under the current and proposed rules and regulations of the SEC, the Company is currently not required to comply with all of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 until the Company files its Annual Report on Form 10-K for the Company’s fiscal year ending June 30, 2010, as long as the Company continues to meet the definition of a non-accelerated filer. In the Company’s Annual Report on Form 10-K for the year ending June 30, 2009, the Company’s management is required to provide an assessment as to the effectiveness of the Company’s internal control over financial reporting, which assessment will be deemed furnished to rather than filed with the SEC. In the Company’s Annual Report on Form 10-K for the year ending June 30, 2010 and for each fiscal year thereafter, the Company’s management will be required to provide an assessment as to the effectiveness of our internal control over financial reporting and the Company’s independent registered public accounting firm will be required to provide an attestation as to the Company’s management’s assessment, which assessment and attestation will be filed with the SEC. The assessment and attestation processes required by Section 404 are relatively new to the Company. Accordingly, the Company may encounter problems or delays and additional expense in completing its obligations and receiving an unqualified report on the Company’s internal control over financial reporting by the Company’s independent registered public accounting firm.

          While the Company believes that it will be able to timely meet the Company’s obligations under Section 404 and that the Company’s management will be able to certify as to the effectiveness of the Company’s internal control over financial reporting, there is no assurance that the Company will be able to do so. If the Company is unable to timely comply with Section 404, the Company’s management is unable to certify as to the effectiveness of the Company’s internal control over financial reporting or the Company’s independent registered public accounting firm is unable to attest to that certification, the price of the Company’s common stock may be adversely affected. Even if the Company timely meets the certification and attestation requirements of Section 404, it is possible that the Company’s independent registered public accounting firm will advise the Company that they have identified significant deficiencies and/or material weaknesses, which may also adversely affect the price of our common stock.

Substantially all of our cash and cash equivalents and marketable securities are held at a single financial institution.  

          Substantially all of the Company’s cash and cash equivalents and short-term marketable securities are presently held at one national financial institution. Accordingly, the Company is subject to credit risk if this financial institution is unable to repay the balance in the account or deliver the Company’s securities or if the financial institution should become bankrupt or otherwise insolvent. Any of the above events could have a material and adverse effect on the Company’s business and financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS:

          The Company does not believe there are any unresolved SEC staff comments.

ITEM 2. PROPERTIES

          The Company currently leases an aggregate of approximately 103,650 square feet of space for its (i) corporate offices in Wayne, Pennsylvania, (ii) Drew has administrative offices and/or manufacturing facilities in Barrow-in-Furness, United Kingdom, Dallas, Texas, Rennes, France (BioCode) and Miami, Florida (JAS) and Waterford, Connecticut. (iii) Sonomed has a manufacturing facility in Lake Success, New York, and (iv) Vascular has a manufacturing facility in New Berlin, Wisconsin. (v) EMI has a product design and development facility in Lawrence, Massachusetts. The corporate offices in Pennsylvania cover approximately 6,000 square feet and expire in July 2013. The facility in the United Kingdom covers approximately 4,800 square feet whose lease expires in September 2011. The facility in Texas covers approximately 20,000 square feet whose lease expires in March 2014. The facility in Rennes covers approximately 23,800 square feet and expires in January 2015. The Miami facility lease covers approximately 20,000 square feet and expires in July 2015. The Connecticut facility lease covers approximately 3,150 square feet and expires in January 2010. The New York facility leases covering approximately 12,200 square feet, expires in October 2011. The Wisconsin lease, covering approximately 11,200 square feet of space expires in July 2015. The Massachusetts lease, covering 2,500 square feet is a

month to month lease. Annual rent under all of the Company’s property and equipment lease arrangements was approximately $855,000 for the year ended June 30, 2009.

ITEM 3. LEGAL PROCEEDINGS

          The Company, from time to time is involved in various legal proceedings and disputes that arise in the normal course of business. These matters have previously and could pertain to intellectual property disputes, commercial contract disputes, employment disputes, and other matters. The Company does not believe that the resolution of any of these matters has had or is likely to have a material adverse impact on the Company’s business, financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          The 2008 Annual Meeting of Shareholders was held on June 29, 2009. The following matters were acted upon:

          The following persons were elected as Class III directors of the Company, each for a term of three years and until his or her successor is elected and qualified.

Nominees for Director		For				Against				Withheld
Richard J. DePiano			6,499,167				0				75,568
Jay L. Federman, MD			6,506,233				0				69,502

          The other persons continuing as Directors of the Company after the Annual Meeting of Shareholders are Anthony J. Coppola, Lisa Napolitano, Fred Choate and William L.G. Kwan.

PART II.

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

          The Company’s common stock trades on the NASDAQ Capital Market under the symbol “ESMC.” The table below sets forth, for the periods indicated, the high and low sales prices as quoted on the NASDAQ Capital Market.

		High				Low
Fiscal year ended June 30, 2009
Quarter ended September 30, 2008		$	3.12			$	2.00
Quarter ended December 31, 2008		$	2.00			$	0.88
Quarter ended March 31, 2009		$	2.30			$	1.40
Quarter ended June 30, 2009		$	2.35			$	1.60
Fiscal year ended June 30, 2008
Quarter ended September 30, 2007		$	8.60			$	3.95
Quarter ended December 31, 2007		$	5.72			$	2.99
Quarter ended March 31, 2008		$	4.39			$	2.78
Quarter ended June 30, 2008		$	3.40			$	2.86

          As of September 30, 2009, there were 4,355 holders of record of the Company’s common stock. On September 30, 2009 the closing price of the Company’s Common Stock as reported by the NASDAQ Capital Market was $2.07 per share.

          Escalon has never declared or paid a cash dividend on its common stock and presently intends to retain any future earnings to finance future growth and working capital needs.

ITEM 6. SELECTED FINANCIAL DATA

          The following selected financial data are derived from the consolidated financial statements of the Company. The data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein in Item 7 and the financial statements and related notes to consolidated financial statements thereto included herein in Item 8.

		For the Years Ended June 30,
		2009				2008				2007				2006				2005
		(Amounts in thousands, except per share amounts)
Statement of Operations Data:
Net revenues:
Product revenue		$	34,468			$	29,988			$	27,893			$	27,544			$	23,864
Other revenue			133				222				10,945				2,247				3,060
Revenues, net			34,601				30,210				38,838				29,791				26,924
Costs and expenses:
Cost of goods sold			19,548				17,310				15,771				16,004				13,158
Marketing, general and administrative			14,847				14,392				13,806				13,995				12,556
Research and development			3,474				4,058				3,461				2,828				1,893
Goodwill impairment			9,526				9,575				0				0				0
Total costs and expenses			47,395				45,335				33,038				32,827				27,607
(Loss) income from operations			(12,794	)			(15,125	)			5,800				(3,036	)			(683	)
Other (expense) and income:
Gain on sale of assets			92				0				0				0				0
Gain on sale of available for sale securities			0				0				75				1,157				3,412
Equity in Ocular Telehealth Management, LLC			(65	)			(88	)			(88	)			(174	)			(64	)
Interest income			19				300				208				162				69
Interest expense			(216	)			(12	)			(29	)			(64	)			(55	)
Total other (expense) and income			(172	)			200				166				1,081				3,362
Net (loss) income before taxes			(12,966	)			(14,925	)			5,966				(1,955	)			2,679
Provision for income taxes			0				135				51				31				232
Net (loss) income		$	(12,966	)		$	(15,060	)		$	5,915			$	(1,986	)		$	2,447
Basic net (loss) income per share		$	(1.82	)		$	(2.36	)		$	0.93			$	(0.32	)		$	0.42
Diluted net (loss) income per share		$	(1.82	)		$	(2.36	)		$	0.92			$	(0.32	)		$	0.39
Weighted average shares — basic used in per share calculation			7,138				6,389				6,375				6,152				5,832
Weighted average shares — diluted used in per share calculation			7,138				6,389				6,434				6,152				6,231

		(Amounts in thousands)
Balance Sheet Data:
Cash and cash equivalents		$	1,810			$	3,708			$	8,879			$	3,380			$	5,116
Working capital			10,713				10,547				17,238				10,616				13,613
Total assets			25,055				31,896				45,017				38,645				40,049
Short term debt			1,375				502				150				233				230
Long-term debt, net of current portion			4,741				251				0				163				392
Total liabilities			12,617				7,364				5,612				5,545				5,530
Accumulated deficit			(56,233	)			(43,267	)			(28,208	)			(34,122	)			(32,136	)
Shareholders’ equity			12,439				24,532				39,406				33,100				34,519

No cash dividends were paid in any of the periods presented.

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion and analysis should be read together with the consolidated financial statements and notes thereto and other financial information contained elsewhere in this Form 10-K and the discussion under “Risk Factors” included in Part IA of this Form 10-K.

          The Company operates primarily in five reportable business segments: Drew, Sonomed, Vascular, Medical/Trek and EMI.

          Drew is a diagnostics company specializing in the design, manufacture and distribution of instruments for blood cell counting and blood analysis. Drew is focused on providing instrumentation and consumables for the physician office and veterinary office laboratories. Drew also supplies the reagent and other consumable materials needed to operate the instruments. Drew added to its reagent business with the May 29, 2008 purchase of JAS and the December 31, 2008 acquisition of certain assets of BioCode Hycel (see footnote 12).

          Sonomed develops, manufactures and markets ultrasound systems used for diagnosis or biometric applications in ophthalmology.

          Vascular develops, manufactures and markets vascular access products.

          Medical/Trek develops, manufactures and distributes ophthalmic surgical products under the Escalon Medical Corp. and/or Trek Medical Products names.

          EMI manufactures and markets digital camera systems for ophthalmic fundus photography. For a more complete description of these businesses and their products, see Item 1 – Description of Business.

          Executive Overview – Fiscal Years Ended June 30, 2009 and 2008

          The following highlights are discussed in further detail within this Form 10-K. The reader is encouraged to read this Form 10-K in its entirety to gain a more complete understanding of factors impacting Company performance and financial condition.

•

Product revenue increased approximately 14.9% during fiscal year ended June 30, 2009 as compared to the prior fiscal year. The increase is primarily related to strong sales in the Company’s Drew and EMI business units which increased approximately 35.7% and 17.9%, respectively, offset by sales decreases in the Sonomed, Vascular and Trek business units of 2.1%, 6.1% and 10.5%, respectively.

	•		Other revenue decreased approximately $89,000 or 40.1% during the fiscal year ended June 30, 2009 as compared to the prior fiscal year. The decrease is due decreased royalties earned from the Bio-Rad royalty agreement.
	•		Cost of goods sold as a percentage of product revenue decreased to approximately 56.7% of revenues during the fiscal year ended June 30, 2009, as compared to approximately 57.7% of product revenue for the prior fiscal year. Gross margins in the Drew business segment have historically been lower than those in the Company’s other business units. Cost of goods sold in the Drew business segment was approximately 62.0% of product revenue during the fiscal year ended June 30, 2009 as compared to approximately 67.0% in the prior fiscal year. The aggregate cost of goods sold as a percentage of product revenue of the Sonomed, Vascular, EMI and Medical/Trek business units during fiscal year ended June 30, 2009 decreased to approximately 50.9% of product revenue from approximately 52.0% in the prior fiscal year.
	•		Operating expenses decreased approximately .7% during the fiscal year ended June 30, 2009 as compared to the prior fiscal year. This was due to increased marketing, general and administrative expenses of 3.2% offset by a 14.4% decrease in research and development expenses related to the decision to drastically reduce Drew’s research and development department in June 2008 in favor to a move to an outsourced research and development model.
	•		The Company concluded that all $9,526,000 of the goodwill recorded at Sonomed was impaired as of June 30, 2009 and $9,575,000 of the goodwill recorded at Drew was impaired as of June 30, 2008. As a result, the Company recorded a non-cash goodwill impairment charge to operations totaling $9,526,000 and $9,575,000 for the year ended June 30, 2009 and 2008, respectively (see footnote 4 of notes to consolidated financial statements for additional information).

     Results of Operations

          Fiscal Years Ended June 30, 2009 and 2008

          The following table shows consolidated product revenue by business segment as well as identifying trends in business segment product revenues for the fiscal years ended June 30, 2009 and 2008. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2009				2008				% Change
Product Revenue:
Drew		$	18,085			$	13,332				35.7	%
Sonomed			9,175				9,367				-2.1	%
Vascular			3,868				4,119				-6.1	%
EMI			2,078				1,762				17.9	%
Medical/Trek			1,262				1,410				-10.5	%
Total		$	34,468			$	29,990				14.9	%

          Consolidated product revenue increased approximately $4,478,000, or 14.9%, to $34,468,000 during the year ended June 30, 2009 as compared to the last fiscal year.

          In the Drew business unit, product revenue increased $4,753,000, or 35.7%, as compared to last fiscal year. The increase is primarily due to the acquisition of JAS on May 29, 2008 and of Biocode Hycel on December 31, 2008 which combined increased revenue by $4,405,000. The remainder of the increase is primarily due to strong sales of Drew’s D3 instrument which received FDA approval on December 18, 2008.

          Product revenue decreased $192,000, or 2.1%, to $9,175,000 in the Sonomed business segment as compared to the last fiscal year. This decrease in volume is related to the global economic downturn and the effect it has had on the ability of Sonomed’s traditional customer base to add additional or upgraded capital equipment at this time. These troubling economic conditions have also lead to increased sales discounts to Sonomed’s distributors in order to entice end users to purchase or to compete with toughening competition.. (see “Goodwill Impairment-Sonomed below and footnote 4 of notes to consolidated financial statements for further discussion).

          Product revenue decreased $251,000, or 6.1%, to $3,868,000 in the Vascular business segment during the year ended June 30, 2009 as compared to last fiscal year. The decrease was primarily caused by the introduction of the VascuView instrument in February 2008 which generated a $550,000 one time sale during the prior year, however current year sales of the VascuView were not material due to certain limitations in its functionality. The VascuView is currently being enhanced and is expected to contribute to revenue during the second half of 2010. The large decrease in VascuView sales were offset by increased volume in Vascular’s core needle business of approximately $274,000.

          Product revenue increased $316,000, or 17.9%, in the EMI business segment when compared to the last fiscal year. The EMI product offering of digital imaging systems continues to expand and has seen increased market acceptance during the year ended June 30, 2009.

          In the Medical/Trek business unit, product revenue decreased $148,000, or 10.5%, to $1,262,000 during the year ended June 30, 2009 as compared to the last fiscal year. The decrease is related to the continued aging of Medical/Trek’s product offerings.

          The following table presents consolidated other revenue by reportable business segment for the fiscal years ended June 30, 2009 and 2008. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2009				2008				% Change
Other Revenue:
Drew		$	133			$	222				-40.1	%
Sonomed			0				0				0.0	%
Vascular			0				0				0.0	%
EMI			0				0				0.0	%
Medical/Trek			0				0				0.0	%
Total		$	133			$	222				-40.1	%

          Consolidated other revenue decreased by approximately $89,000, or 40.1%, to $133,000 during the fiscal year ended June 30, 2009 as compared to the prior fiscal year. The decrease is due to decreased royalties earned from Bio-Rad royalty agreement (see footnote 11 of notes to the consolidated financial statements).

          The following table presents consolidated cost of goods sold by reportable business segment and as a percentage of related segment product revenues for the fiscal years ended June 30, 2009 and 2008. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2009				%				2008				%
Cost of Goods Sold:
Drew		$	11,207				62.0	%		$	8,928				67.0	%
Sonomed			4,974				54.2	%			5,029				53.7	%
Vascular			1,450				37.5	%			1,538				37.3	%
EMI			1,069				51.4	%			820				46.5	%
Medical/Trek			848				67.2	%			995				70.6	%
Total		$	19,548				56.7	%		$	17,310				57.7	%

          Consolidated cost of goods sold totaled approximately $19,548,000, or 56.7%, of product revenue, for the fiscal year ended June 30, 2009 as compared to $17,310,000, or 57.7%, of product revenue, for the prior fiscal year.

          Cost of goods sold in the Drew business segment totaled $11,207,000, or 62.0%, of product revenue, for the fiscal year ended June 30, 2009 as compared to $8,928,000, or 67.0%, of product revenue, for the prior fiscal year. The decrease in the cost of goods sold as a percentage of revenue is due to the acquisitions of JAS on May 29, 2008 and certain assets of Biocode Hycel on December 31, 2008. Sales at both of these divisions consist primarily of higher margin reagent sales. These higher margin sales have been offset by margin compression related to the continued strength of the Euro against the US Dollar which negatively affects the margins on Drew’s new D3 offering that is manufactured in France by an OEM partner.

          Cost of goods sold in the Sonomed business segment totaled $4,974,000, or 54.2%, of product revenue, for the fiscal year ended June 30, 2009 as compared to $5,029,000, or 53.7%, of product revenue, for prior fiscal year. The increase in Sonomed’s cost of goods sold as a percentage of revenue was primarily caused by an increase in sales discounts during the period as a result of sales to the more price sensitive international market combined with a decrease in overall domestic sales.

          Cost of goods sold in the Vascular business segment totaled $1,450,000, or 37.5%, of product revenue, for fiscal year ended June 30, 2009 as compared to $1,538,000, or 37.3%, of product revenue, for the last fiscal year. The relatively unchanged cost of goods as a percentage of product revenue is indicative of Vascular’s continued solid margins on its core needle business.

          Cost of goods sold in the EMI business segment totaled $1,069,000, or 51.4%, of product revenue, for fiscal year ended June 30, 2009 as compared to $820,000, or 46.5%, of product revenue, for the last fiscal year. The increase as a percentage of product revenue was due to the need to increase discounts related to the difficult economic environment experienced during the current year.

          Cost of goods sold in the Medical/Trek business segment totaled $848,000, or 67.2%, of product revenue, for the fiscal year ended June 30, 2009 as compared to $995,000, or 70.6%, of product revenue, for the last fiscal year. The decrease as a percentage of product revenue was due to price increase to its customers.

          The following table presents consolidated marketing, general and administrative expenses as well as identifying trends in business segment marketing, general and administrative expenses for the fiscal years ended June 30, 2009 and 2008. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2009				2008				% Change
Marketing, General and Administrative:
Drew		$	7,090			$	5,287				34.1	%
Sonomed			2,485				2,219				12.0	%
Vascular			1,458				1,576				7.5	%
EMI			601				605				-0.7	%
Medical/Trek			3,213				4,705				31.7	%
Total		$	14,846			$	14,392				3.2	%

          Consolidated marketing, general and administrative expenses increased $454,000, or 3.2%, to $14,846,000 during the fiscal year ended June 30, 2009 as compared to the prior fiscal year.

          Marketing, general and administrative expenses in the Drew business segment increased $1,803,000, or 34.1%, to $7,090,000 as compared to the same period last fiscal year. The increase is primarily due to the acquisitions of JAS on May 29, 2008 and certain assets of Biocode Hycel on December 31, 2008 offset by significantly lower legal fees during the current year and by reductions in force implemented in June 2008.

          Marketing, general and administrative expenses in the Sonomed business segment increased by $266,000, or 12.0%, to $2,485,000 as compared to the prior fiscal year. The increase is due primarily to the addition of a marketing consultant in the United States and the addition of a consultant in South-east Asia and increased travel and advertising related to marketing and trade show activity during the current year.

          Marketing, general and administrative expenses in the Vascular business segment decreased $118,000, or 7.5%, to $1,458,000 as compared to the same period last fiscal year. This decrease is related to a reduction in force at our Wisconsin facility and decreased participation in trade shows and advertising.

          Marketing, general and administrative expenses in the EMI business segment decreased $4,000 or         .7% to $601,000 as compared to last fiscal year.

          The Medical/Trek business unit’s marketing, general and administrative expenses decreased $1,492,000 or 31.7% to $3,213,000 as compared to the last fiscal year. The decrease was due primarily to a reduction in force, lower compensation expense for directors under SFAS No. 123(R) rules, decreased expenses for third party consultants in valuation services, information technology and accounting, and a reduction in legal fees.

          The following table presents consolidated research and development expenses by reportable business segment and as a percentage of related segment product revenues for the fiscal years ended June 30, 2009 and 2008. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2009				2008				% Change
Research and Development:
Drew		$	1,800			$	2,745				-34.4	%
Sonomed			1,085				779				39.3	%
Vascular			219				260				-15.8	%
EMI			362				268				35.1	%
Medical/Trek			9				6				50.0	%
Total		$	3,475			$	4,058				-14.4	%

          Consolidated research and development expenses decreased $583,000, or 14.4%, to $3,475,000 during the fiscal year ended June 30, 2009 as compared to the prior fiscal year. Research and development expenses were primarily expenses associated with the planned introduction of new or enhanced products in the Drew, Sonomed, Vascular and EMI business units.

          Research and development expenses in the Drew business segment decreased $945,000, or 34.4%, to $1,800,000. The decrease is related to the decision made in June 2008 to drastically reduce Drew’s research and development department and move to an outsourced research and development model.

          Research and development expenses in the Sonomed business segment increased $306,000 or 39.3%, to $1,085,000 as compared to the last fiscal year. The increase is primarily due to consulting expenses incurred during the year related to the development two new products, the VuMax III, and the PacScan Plus. The PacScan Plus has been completed and received FDA approval in September 2009. Additional work on the VuMax III has been suspended.

          Research and development expenses in the Vascular business segment decreased $41,000 or 15.8%, to $219,000 as compared to the last fiscal year. The decrease was due to higher costs in the prior year related to the completion of the VascuViewTM, a new visual ultrasound device, which received FDA approval on January 20, 2008.

          Research and development in the EMI business segment increased $94,000 or 35.1%, to $362,000 as compared to the last fiscal year. The increase was primarily due to higher expenses in the current period related to the development of the new Access product.

          Research and development in the Medical/Trek business segment increased $3,000 to $9,000 as compared to the last fiscal year.

          Gain on sale of assets was approximately $92,000 and $0 during the fiscal years ended June 30, 2009 and 2008, respectively due to the sale of assets at Drew related to Drew’s decision to outsource future machine shop operations.

          The Company recognized a loss of approximately $65,000 and $88,000 related to its investment in Ocular Telehealth Management (“OTM”) during the fiscal years ended June 30, 2009 and 2008, respectively. Commencing July 1, 2005, the Company began recognizing all of the losses of OTM in its consolidated financial statements. OTM is an early stage privately held company. Prior to July 1, 2005, the share of OTM’s loss recognized by the Company was in direct proportion to the Company’s ownership equity in OTM. OTM began operations during the three-month period ended September 30, 2004. (See note 13 of the notes to consolidated financial statements.)

          Interest income was $19,000 and $300,000 for the fiscal years ended June 30, 2009 and 2008, respectively. The increase was due to higher cash balances and effective yields on investments.

          Interest expense was $216,000 and $12,000 for the fiscal years ended June 30, 2009 and 2008, respectively. The increase is related to increased debt related to the JAS and Biocode acquisitions.

Goodwill Impairment-Sonomed

          During the last six months of the fiscal year ended June 30, 2009 Sonomed experienced a significant decrease in demand for its product offering. The Company believes that this decrease in volume is related to the global economic downturn and the effect it has had on the ability of Sonomed’s traditional customer base to add additional or upgraded capital equipment at this time. These troubling economic conditions have also lead to increased sales discounts to Sonomed’s distributors in order to entice end users to purchase or to compete with toughening competition. These uncertainties in the market along with increased competition from existing competitors and emerging technologies have made it difficult for Sonomed to project future revenue and cash flow. The effect these conditions had on fiscal 2009’s actual performance as compared to budgeted performance was significant with actual profitability approximately 65% lower than anticipated. The Company believes that these negative sales and profitability trends will continue for the foreseeable future and thus will have a significant negative effect on Sonomed’s estimated future operating results and cash flow. Sonomed reduced its work force by 13% during the fourth quarter of the year ended June 30, 2009 in response to these uncertainties. Sonomed believes that these events negatively affected the evaluation of the future operating results and cash flows of Sonomed.

          The Company tests goodwill for possible impairment on an annual basis and at any other time events occur or circumstances indicate that the carrying amount of goodwill may be impaired.

          The first step of the SFAS No. 142 impairment analysis consists of a comparison of the fair value of the reporting segment with its carrying amount, including the goodwill. The fair value was determined based on the income approach, which estimates the fair value based on the future discounted cash flows. Under the income approach, the Company assumed, with respect to Sonomed, a forecasted cash flow period of five years, long-term annual growth rates of 3% and a discount rate of 19%.

          Based on the annual income approach analysis that was separately performed for each operating segment, it was determined that in the Sonomed segment the carrying amount of the goodwill was in excess of its respective fair value. As such, the Company was required to perform the second step analysis for Sonomed in order to determine the amount of the goodwill impairment. The second step analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of the goodwill, with an impairment charge resulting from any excess of the carrying value of the goodwill over the implied fair value of the goodwill. Based on the second step analysis, the Company concluded that all $9,525,550 of the goodwill recorded at Sonomed was impaired. As a result, the Company recorded a non-cash goodwill impairment charge to operations totaling $9,525,550 for the year ended June 30, 2009.

          The determination as to whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of the Company. The assumptions supporting the estimated future cash flows of the reporting segment, including profit margins, long-term forecasts, discount rates and terminal growth rates, reflect the Company’s best estimates.

Goodwill Impairment-Drew

          Drew encountered a series of events during the third and fourth quarters of the fiscal year ended June 30, 2008 that had a material effect on the valuation of our goodwill related to the purchase of Drew. These events include a development delay of Drew’s DS-360 instrument that Drew had previously anticipated would be completed by the fourth quarter of the fiscal year ending June 30, 2008, and a contract dispute with Point Care Technologies (”PCT”) that has delayed the development of Drew’s 2280 HT HIV instrument (see footnote 8 “Commitments and Contingencies” in the notes to the financial statements in the Company’s Form 10-K annual report for the fiscal year ended June 30, 2008).

          The development of Drew’s proposed new diabetes instrument, the DS-360, is indefinitely delayed because of difficulties related to the final phase of its development. The DS-360 is intended as Drew’s next generation diabetes instrument, which is a key line of business for Drew. The uncertainty of the DS-360’s completion combined with the continued aging of Drew’s existing diabetes instrument offerings has had a negative impact on Drew’s estimated future operating results and cash flow. Drew, in consultation with independent consultants, continues to evaluate the development status of the DS-360 project. Until the evaluation is completed, Drew cannot estimate the timing of the 510(k) application submission for the instrument to the FDA or whether the submission will be made.

          Also, Drew had anticipated that the joint development project it had undertaken with PCT of Drew’s 2280 HT HIV instrument would be completed during the fiscal year ended June 30, 2008. In December 2008 Drew settled a contract dispute with PCT relating to this project (see footnote 8 “Commitments and Contingencies” in the Company’s Form 10-K annual report for the fiscal year ended June 30, 2008 for details on the dispute). As part of the settlement, dated November 3, 2008 Drew and PCT are no longer jointly developing the 2280 HT HIV instrument, and Drew is unable to estimate when or if the 2280 HT HIV instrument will be completed. Drew undertook the development effort at considerable cost because it believed that the 2280 HT HIV instrument had significant potential in monitoring the status of HIV patients. The uncertainty whether the 2280 HT HIV will be completed has had a negative impact on Drew’s estimated future operating results and cash flow.

          Because of these developments and the continued diminished operating results of Drew’s aging legacy projects, the Company reduced its work force during the fourth quarter of the year ended June 30, 2008 by 23 positions and restructured certain management responsibilities. These events negatively affected the evaluation by the Company of the future operating results and cash flows of Drew.

          The Company tests goodwill for possible impairment on an annual basis and at any other time events occur or circumstances indicate that the carrying amount of goodwill may be impaired.

          The first step of the SFAS No. 142 impairment analysis consists of a comparison of the fair value of the reporting segment with its carrying amount, including the goodwill. The fair value was determined based on the income approach, which estimates the fair value based on the future discounted cash flows. Under the income approach, the Company assumed, with respect to Drew, a forecasted cash flow period of five years, long-term annual growth rates of 5% and a discount rate of 14%.

          Based on the annual income approach analysis that was separately performed for each operating segment, it was determined that in the Drew segment the carrying amount of the goodwill was in excess of its respective fair value. As such, the Company was required to perform the second step analysis for Drew in order to determine the amount of the goodwill impairment. The second step analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of the goodwill, with an impairment charge resulting from any excess of the carrying value of the goodwill over the implied fair value of the goodwill. Based on the second step analysis, the Company concluded that all $9,574,655 of the goodwill recorded at Drew was impaired. As a result, the Company recorded a non-cash goodwill impairment charge to operations totaling $9,574,655 for the year ended June 30, 2008.

          The determination as to whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of the Company. The assumptions supporting the estimated future cash flows of the reporting segment, including profit margins, long-term forecasts, discount rates and terminal growth rates, reflect the Company’s best estimates.

Results of Operations

          Fiscal Years Ended June 30, 2008 and 2007

          The following table shows consolidated product revenue by business segment as well as identifying trends in business segment product revenues for the fiscal years ended June 30, 2008 and 2007. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2008				2007				% Change
Product Revenue:
Drew		$	13,332			$	11,627				14.7	%
Sonomed			9,367				9,823				-4.6	%
Vascular			4,119				3,467				18.8	%
EMI			1,762				1,484				18.7	%
Medical/Trek			1,410				1,492				-5.5	%
Total		$	29,990			$	27,893				7.5	%

          Consolidated product revenue increased approximately $2,097,000, or 7.5%, to $29,990,000 during the year ended June 30, 2008 as compared to the fiscal year ended June 30, 2007.

          In the Drew business unit, product revenue increased $1,705,000, or 14.7%, as compared to the fiscal year ended June 30, 2007. The increase is primarily due to the sales of Drew’s D3 instrument which received FDA approval on December 18, 2008, strong demand for the Primus instrument and continued growth of Drew’s reagent sales from its United Kingdom facility.

          Product revenue decreased $456,000, or 4.6%, to $9,367,000 in the Sonomed business segment as compared to the fiscal year ended June 30, 2007. The decrease in product revenue was caused by the continued migration of Sonomed’s revenue to International markets. The international market is served primarily by distributors who receive significant discounts as compared to traditional direct sales in the domestic market.

          Product revenue increased $652,000, or 18.8%, to $4,119,000, at the Vascular business segment during the year ended June 30, 2008 as compared to the fiscal year ended June 30, 2007. The increase was primarily caused by the introduction of the new VascuView instrument which generated $550,000 in revenue during the year. Overall needle volume was lower during the year. A midyear price adjustment, however, resulted in higher needle revenue for the year.

          Product revenue increased $278,000, or 18.7%, in the EMI business segment when compared to the fiscal year ended June 30, 2007. This increase is attributable to the increase in sales of the digital imaging systems from the January 2006 MRP acquisition.

          In the Medical/Trek business unit, product revenue decreased $82,000, or 5.5%, to $1,410,000 during the year ended June 30, 2008 as compared to the fiscal year ended June 30, 2007.

          The following table presents consolidated other revenue by reportable business segment for the fiscal years ended June 30, 2008 and 2007. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2008				2007				% Change
Other Revenue:
Drew		$	222			$	243				-8.6	%
Sonomed			0				0				0.0	%
Vascular			0				0				0.0	%
EMI			0				0				0.0	%
Medical/Trek			0				10,702				-100.0	%
Total		$	222			$	10,945				-98.0	%

          Consolidated other revenue decreased by approximately $10,723,000, or 98.0%, to $222,000 during the fiscal year ended June 30, 2008 as compared to the fiscal year ended June 30, 2007. The decrease is primarily due to the $9,600,000 settlement reached with Intralase on February 27, 2007. Under the settlement agreement, Intralase made a lump sum payment to Escalon of $9,600,000 in exchange for which all pending litigation between the parties was dismissed, the parties exchanged general releases, the Company transferred to Intralase its ownership of patents and intellectual property formerly licensed to Intralase by the Company, and the License Agreement was terminated. In addition, the payment from Intralase satisfied all outstanding past, current and future royalties owed or alleged to be owed by Intralase to the Company.

          The following table presents consolidated cost of goods sold by reportable business segment and as a percentage of related segment product revenues for the fiscal years ended June 30, 2008 and 2007. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2008				%				2007				%
Cost of Goods Sold:
Drew		$	8,928				67.0	%		$	7,681				66.1	%
Sonomed			5,029				53.7	%			4,976				50.7	%
Vascular			1,538				37.3	%			1,393				40.2	%
EMI			820				46.5	%			711				47.9	%
Medical/Trek			995				70.6	%			1,011				67.8	%
Total		$	17,310				57.7	%		$	15,772				56.5	%

          Consolidated cost of goods sold totaled approximately $17,310,000, or 57.7%, of product revenue, for the fiscal year ended June 30, 2008 as compared to $15,772,000, or 56.5%, of product revenue, for the fiscal year ended June 30, 2007.

          Cost of goods sold in the Drew business segment totaled $8,928,000, or 67.0%, of product revenue, for the fiscal year ended June 30, 2008 as compared to $7,681,000, or 66.1%, of product revenue, for the fiscal year ended June 30, 2007. The increase in the cost of goods sold as a percentage of revenue is due to the margin compression related to the continued strength of the Euro against the US Dollar which negatively affects the margins on Drew’s new D3 offering that is manufactured in France by an OEM partner. The decrease in instrument gross margins was partially offset by an increase in the sale of higher volume spare parts and continued sales of higher gross margin reagents.

          Cost of goods sold in the Sonomed business segment totaled $5,029,000, or 53.7%, of product revenue, for the fiscal year ended June 30, 2008 as compared to $4,976,000, or 50.7%, of product revenue, for the fiscal year ended June 30, 2007. The increase in Sonomed’s cost of goods sold as a percentage of revenue was primarily caused by an increase in sales discounts during the period as a result of sales to the more price sensitive international market combined with a decrease in overall domestic sales of the Company’s Vumax II ultrasound systems.

          Cost of goods sold in the Vascular business segment totaled $1,538,000, or 37.3%, of product revenue, for fiscal year ended June 30, 2008 as compared to $1,393,000, or 40.2%, of product revenue, for the fiscal year ended June 30, 2007. The decrease as a percentage of product revenue was due to a price increase during the year on traditional needle business offset by the $585,000 of revenue during the year on Vascular’s new lower margin VascuView product.

          Cost of goods sold in the EMI business segment totaled $820,000, or 46.5%, of product revenue, for fiscal year ended June 30, 2008 as compared to $711,000, or 47.9%, of product revenue, for the fiscal year ended June 30, 2007. The decrease as a percentage of product revenue was due to continued production efficiencies and lower sales discounts in the second half of 2008.

          Cost of goods sold in the Medical/Trek business segment totaled $995,000, or 70.6%, of product revenue, for the fiscal year ended June 30, 2008 as compared to $1,011,000, or 67.8%, of product revenue, for the fiscal year ended June 30, 2007. The increase as a percentage of product revenue was due to increased material costs that Trek was unable to completely pass on to its customers.

          The following table presents consolidated marketing, general and administrative expenses as well as identifying trends in business segment marketing, general and administrative expenses for the fiscal years ended June 30, 2008 and 2007. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2008				2007				% Change
Marketing, General and Administrative:
Drew		$	5,287			$	5,475				-3.4	%
Sonomed			2,219				1,931				14.9	%
Vascular			1,576				1,598				-1.4	%
EMI			605				480				26.0	%
Medical/Trek			4,705				4,323				8.8	%
Total		$	14,392			$	13,807				4.2	%

          Consolidated marketing, general and administrative expenses increased $585,000, or 4.2%, to $14,392,000 during the fiscal year ended June 30, 2008 as compared to the fiscal year ended June 30, 2007.

          Marketing, general and administrative expenses in the Drew business segment decreased $188,000, or 3.4%, to $5,287,000 as compared to the fiscal year ended June 30, 2007. The decrease is primarily due to a reduction in headcount during the year offset by increased legal fees of approximately $250,000 related to breach of contract litigation between Drew and PointCare Technologies. During June 2008 Drew decided to outsource future research and development projects resulting in a reduction in force of 23 positions.

          Marketing, general and administrative expenses in the Sonomed business segment increased by $288,000, or 14.9%, to $2,219,000 as compared to the fiscal year ended June 30, 2007. The increase is due primarily to the increase in international marketing consulting in Europe and the addition of a consultant in South-east Asia, increased travel and advertising related to marketing and trade show activity during the current year.

          Marketing, general and administrative expenses in the Vascular business segment decreased $22,000, or 1.4%, to $1,576,000 as compared to the fiscal year ended June 30, 2007.

          Marketing, general and administrative expenses in the EMI business segment increased $125,000 or 26.0% to $605,000 as compared to the fiscal year ended June 30, 2007. The increase is primarily related to the addition of sales people during the year.

          The Medical/Trek business unit’s marketing, general and administrative expenses increased $382,000 or 8.8% to $4,705,000 as compared to the fiscal year ended June 30, 2007. The increase was due primarily to the addition of a chief operating officer and controller during the year, compensation expense for directors under SFAS No. 123(R) rules, and increased third party consultants in valuation services, information technology and the implementation of a new Company wide ERP system during the year.

          The following table presents consolidated research and development expenses by reportable business segment and as a percentage of related segment product revenues for the fiscal years ended June 30, 2008 and 2007. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2008				2007				% Change
Research and Development:
Drew		$	2,745			$	2,355				16.6	%
Sonomed			779				495				57.4	%
Vascular			260				172				51.2	%
EMI			268				350				-23.4	%
Medical/Trek			6				89				-93.3	%
Total		$	4,058			$	3,461				17.3	%

          Consolidated research and development expenses increased $597,000, or 17.3%, to $4,058,000 during the fiscal year ended June 30, 2008 as compared to the fiscal year ended June 30, 2007. Research and development expenses were primarily expenses associated with the planned introduction of new or enhanced products in the Drew, Sonomed, Vascular and EMI business units.

          Research and development expenses in the Drew business segment increased $390,000, or 16.6%, to $2,745,000. The increase was primarily related to additional salaries and benefits and consulting fees associated with the development of the DS-360, a diabetes instrument, the HT, a CD4 instrument and the development of additional chemical reagents for use on Drew’s Trilogy instrument.

          Research and development expenses in the Sonomed business segment increased $284,000 or 57.4%, to $779,000 as compared to the fiscal year ended June 30, 2007. The increase is primarily due to consulting expenses incurred during the fourth quarter of the fiscal year ended June 30, 2008 related to the development the VuMax III and continued improvements made to Sonomed’s existing product offering.

          Research and development expenses in the Vascular business segment increased $88,000 or 51.2%, to $260,000 as compared to the fiscal year ended June 30, 2007. The increase was primarily due to completing the development of the VascuViewTM, a new visual ultrasound device.

          Research and development in the EMI business segment decreased $82,000 or 23.4%, to $268,000 as compared to the fiscal year ended June 30, 2007. The decrease was primarily due to higher expenses in the prior period related to various enhancements to EMI’s digital systems.

          Research and development in the Medical/Trek business segment decreased $83,000 or 93.3% to $6,000 as compared to the fiscal year ended June 30, 2007. This decrease is due primarily to the elimination of the corporate research and development department in the first quarter of fiscal 2007 related to the Company’s previously announced cost reduction plan.

          Gain on sale of available for sale securities was approximately $0 and $75,000 during the fiscal years ended June 30, 2008 and 2007, respectively due to the sale of 3,000 shares of Intralase common stock during fiscal 2007. The Company has no remaining available for sale securities.

          The Company recognized a loss of approximately $88,000 and $88,000 related to its investment in OTM during the fiscal years ended June 30, 2008 and 2007, respectively. Commencing July 1, 2005, the Company began recognizing all of the losses of OTM in its consolidated financial statements. OTM is an early stage privately held company. Prior to July 1, 2005, the share of OTM’s loss recognized by the Company was in direct proportion to the Company’s ownership equity in OTM. OTM began operations during the three-month period ended September 30, 2004. (See note 14 of the notes to consolidated financial statements.)

          Interest income was $300,000 and $208,000 for the fiscal years ended June 30, 2008 and 2008, respectively. The increase was due to higher cash balances and effective yields on investments.

          Interest expense was $12,000 and $29,000 for the fiscal years ended June 30, 2008 and 2007, respectively.

Liquidity and Capital Resources

          The following table presents overall liquidity and capital resources from continuing operations during the fiscal years ended June 30, 2009 and 2008. Table amounts are in thousands:

		June 30,
		2009				2008
Current Ratio:
Current assets		$	17,561			$	16,573
Less: Current liabilities			6,848				6,026
Working capital		$	10,713			$	10,547
Current ratio		2.6 to 1				2.8 to 1
Debt to Total Capital Ratio:
Notes payable and current maturities		$	1,375			$	502
Long-term debt			4,741				251
Total debt			6,116				753
Total equity			12,439				24,532
Total capital		$	18,555			$	25,285
Total debt to total capital			33.0	%			3.0	%

          Working Capital Position

          Working capital increased $166,000 as of June 30, 2009 and the current ratio decreased to 2.6 to 1 from 2.8 to 1 when compared to June 30, 2008. The increase in working capital was caused primarily by a decrease in cash of $1,898,000 from $3,708,000 to $1,810,000 in 2008 and 2009, respectively. Accounts receivable increased $958,000 from $3,896,000 in 2008 to $4,854,000 in 2009. Overall total current assets increased $988,000 from $16,573,000 in 2008 to $17,561,000 in 2009. Total current liabilities which consist of current portion of long term debt, accounts payable and accrued expenses increased $822,000, from $6,026,000 in 2008 to $6,848,000 in 2009.

          Cash Used In or Provided By Operating Activities

          During fiscal 2009, the Company used approximately $1,688,000 of cash for operating activities as compared to using approximately $2,936,000 for operating activities during the year ended June 30, 2008.

          Loss from operations decreased approximately $2,095,000 in fiscal 2009 as compared to fiscal 2008, from $15,060,000 in 2008 to $12,965,000 in 2009. The net loss for 2009 and 2008 includes a non-cash goodwill impairment charge in the amount of $9,526,000 and $9,575,000, respectively.

          Cash Flows Used In Investing and Financing Activities

          Cash flows used in investing activities for 2009 were approximately $489,000. This amount is made up of purchases of fixed assets of $223,000, investment in OTM of $42,000, and the purchase of certain assets of Biocode Hycel in the amount of $324,000 and offset by the collection on a note receivable of $100,000.

          Cash flows used in investing activities for 2008 were approximately $2,007,000. This amount is made up of the purchase of fixed assets of $613,000, investment in OTM of $69,000 and the purchase of JAS for $1,325,000.

          Any necessary capital expenditures have generally been funded out of cash from operations, and the Company is not aware of any factors that would cause historical capital expenditure levels to not be indicative of capital expenditures in the future and, accordingly, does not believe that the Company will have to commit material resources to capital investment for the foreseeable future.

          Cash flows provided by in financing activities in the amount of $527,000 during 2009 relate to repayment of debt of $502,000, and offset by the proceeds of $1,029,000 from the issuance of common stock.

          Cash flows used in financing activities in the amount of $143,000 during 2008 relate to repayment of debt of $150,000, offset by the proceeds of $7,000 from the exercise of common stock options.

     We believe that our existing cash and cash flow from operations will be sufficient to fund our activities throughout fiscal 2010, however, we have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in “Risk Factors.”

     If we do proceed with raising funds in the future, we may be required to raise those funds through public or private financings, strategic relationships or other arrangements. The sale of additional equity and debt securities may result in additional dilution to our stockholders. Additional financing may not be available in amounts or on terms acceptable to us or at all.

Debt History

          On December 31, 2008 Drew acquired certain assets of Biocode Hycel for approximately $5,900,000 (4,200,000 euros) plus acquisition costs of approximately $300,000. The sales price was payable in cash of approximately $325,000 (approximately 231,000 euros) and $5,875,040 in debt from Drew. The seller provided financing is collateralized by certain assets of Biocode Hycel. Biocode Hycel assets are being vertically integrated into the Company’s clinical diagnostics business that includes Drew and JAS.

The seller-provided financing, which is guaranteed by the Company, requires payment over four years as follows:

	•		the first interest-only payment is due in December of 2009 at an annual interest rate of 7%;
	•		thereafter, every nine months, an interest payment is due at an annual interest rate of 7%;
	•		18 months after the closing date a principal payment of Euro 800,000 is due;
	•		30 months after the closing date a principal payment of Euro 1,000,000 is due;
	•		36 months after the closing date a principal payment of Euro 1,000,000 is due; and
	•		48 months after the closing date a principal payment of Euro 1,375,000 is due.

          The payment amount in United States Dollars will be determined on the payment due date, based upon the then current exchange rate between the United States Dollar and the Euro.

          On May 29, 2008 Drew issued a note payable in the amount of $752,623 related to the purchase of JAS Diagnostics, Inc. The note is collateralized by JAS’ common stock and guaranteed by the Company. Principal is payable in six quarterly installments of $124,437 plus interest at the prime rate (3.5% on June 30, 2009) as published by the Bank of America.

          Off-Balance Sheet Arrangements and Contractual Obligations

          The Company was not a party to any off-balance sheet arrangements as of and for the fiscal years ended June 30, 2009 and 2008. The following table presents the Company’s contractual obligations as of June 30, 2009 (interest is not included in the table as it is not material):

						Less than								3-5				More than
		Total				1 Year				1-3 Years				Years				5 Years
Long-term debt		$	6,115,918			$	1,374,711			$	2,809,600			$	1,931,607			$	0
Operating lease agreements			4,916,069				946,602				1,945,993				1,524,773				498,701
Total		$	11,031,987			$	2,321,313			$	4,755,593			$	3,456,380			$	498,701

     Forward-Looking Statement About Significant Items Likely To Impact Liquidity

     The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses and negative cash flows from operating activities. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. If the Company is unsuccessful in its efforts to raise additional capital in the near term, the Company may be required to significantly reduce its research, development, and administrative activities, including further reduction of its employee base. The 2009 financial statements do not include any adjustments relating to the realization of the carrying value of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuance as a going concern is dependent on our future profitability and on the on-going support of our shareholders, affiliates and creditors. In order to mitigate the going concern issues, we are actively pursuing business partnerships, managing our continuing operations, and seeking capital funding on an ongoing basis via the issuance of securities and private placements.

     We believe that our existing cash and cash flow from operations will be sufficient to fund our activities throughout fiscal 2010, however, we have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital

requirements for product development and commercialization sooner than planned. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in “Risk Factors.”

     If we do proceed with raising funds in the future, we may be required to raise those funds through public or private financings, strategic relationships or other arrangements. The sale of additional equity and debt securities may result in additional dilution to our stockholders. Additional financing may not be available in amounts or on terms acceptable to us or at all.

          On July 23, 2004, the Company acquired approximately 67% of the outstanding ordinary shares of Drew, pursuant to the Company’s exchange offer for all of the outstanding ordinary shares of Drew and subsequently acquired the remaining shares during the fiscal year ended June 30, 2005. As of June 30, 2006, the Company has acquired all of the outstanding ordinary shares of Drew. Drew does not have a history of producing positive operating cash flows and, as a result, at the time of acquisition, was operating under financial constraints and was under-capitalized. As Drew is integrated into the Company, management continues to work to reverse the situation, while at the same time seeking to strengthen Drew’s market position. The Company has loaned approximately $29 million to Drew. The funds have been primarily used to procure components to build up inventory to support the manufacturing process as well as to pay off accounts payable and debt of Drew. The Company may need to provide further working capital for Drew.

Common Stock

          The Company’s common stock is currently listed on the NASDAQ Capital Market. In order to continue to be listed on the NASDAQ Capital Market, the following requirements must be met:

	•		Shareholders’ equity of $2,500,000 or market value of listed securities of $35,000,000 or net income from continuing operations (in the latest fiscal year or two of the last three fiscal years) of $500,000;
	•		500,000 publicly held shares;
	•		$1,000,000 market value of publicly held shares;
	•		A minimum bid price of $1;
	•		300 round lot shareholders;
	•		Two market makers; and
	•		Compliance with corporate governance standards.

          As of June 30, 2009, Escalon complied with these requirements.

          Critical Accounting Policies

          The preparation of financial statements requires management to make estimates and assumptions that impact amounts reported therein. The most significant of those involve the application of Statement of Accounting Standards (“SFAS’) No. 142 “Goodwill and Other Intangible Assets,” discussed further in the notes to consolidated financial statements included in this Form 10-K. The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, and, as such, include amounts based on informed estimates and judgments of management. For example, estimates are used in determining valuation allowances for deferred income taxes, uncollectible receivables, obsolete inventory, sales returns and rebates warranty liabilities and purchased intangible assets. Actual results achieved in the future could differ from current estimates. The Company used what it believes are reasonable assumptions and, where applicable, established valuation techniques in making its estimates.

          Revenue Recognition

          The Company recognizes revenue from the sale of its products at the time of shipment, when title and risk of loss transfer. The Company provides products to its distributors at agreed wholesale prices and to the balance of its customers at set retail prices. Distributors can receive discounts for accepting high volume shipments. The discounts are reflected immediately in the net invoice price, which is the basis for revenue recognition. No further material discounts are given.

          The Company’s considerations for recognizing revenue upon shipment of product to a distributor are based on the following:

	•		Persuasive evidence that an arrangement (purchase order and sales invoice) exists between a willing buyer (distributor) and the Company that outlines the terms of the sale (company information, quantity of goods, purchase price and payment terms). The buyer (distributor) does not have a right of return.
	•		Shipping terms are ex-factory shipping point. At this point the buyer (distributor) takes title to the goods and is responsible for all risks and rewards of ownership, including insuring the goods as necessary.
	•		The Company’s price to the buyer (distributor) is fixed and determinable as specifically outlined on the sales invoice. The sales arrangement does not have customer cancellation or termination clauses.
	•		The buyer (distributor) places a purchase order with the Company; the terms of the sale are cash, COD or credit. Customer credit is determined based on the Company’s policies and procedures related to the buyer’s (distributor’s) creditworthiness. Based on this determination, the Company believes that collectibility is reasonably assured.

          The Company assesses collectibility based on creditworthiness of the customer and past transaction history. The Company performs ongoing credit evaluations of its customers and does not require collateral from its customers. For many of the Company’s international customers, the Company requires an irrevocable letter of credit to be issued by the customer before the purchase order is accepted.

          Valuation of Intangible Assets

          The Company annually evaluates for impairment its intangible assets and goodwill in accordance with SFAS 142, “Goodwill and Other Intangible Assets,” or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, see footnote 4 to consolidated financial statements included in this Form 10-K for details on a goodwill impairment charge related to the carrying amount of Sonomed and Drew’s goodwill. These intangible assets include goodwill, trademarks and trade names. Factors the Company considers important that could trigger an impairment review include significant under-performance relative to historical or projected future operating results or significant negative industry or economic trends. If these criteria indicate that the value of the intangible asset may be impaired, an evaluation of the recoverability of the net carrying value of the asset is made. If this evaluation indicates that the intangible asset is not recoverable, the net carrying value of the related intangible asset will be reduced to fair value. Any such impairment charge could be significant and could have a material adverse impact on the Company’s financial statements if and when an impairment charge is recorded.

          Income/(Loss) Per Share

          The Company computes net income/(loss) per share under the provisions of SFAS No. 128, “Earnings Per Share,” (SFAS 128) and Staff Accounting Bulletin, No. 98 (SAB 98).

          Under the provisions of SFAS 128 and SAB 98, basic and diluted net income/(loss) per share is computed by dividing the net income/(loss) for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net income/(loss) per share excludes potential common shares if the impact is anti-dilutive. Basic earnings per share are computed by

dividing net income/(loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are determined in the same manner as basic earnings per share, except that the number of shares is increased by assuming exercise of dilutive stock options and warrants using the treasury stock method.

Taxes

          Estimates of taxable income of the various legal entities and jurisdictions are used in the tax rate calculation. Management uses judgment in estimating what the Company’s income will be for the year. Since judgment is involved, there is a risk that the tax rate may significantly increase or decrease in any period.

          In determining income/(loss) for financial statement purposes, management must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. SFAS 109 “Accounting for Income Taxes” also requires that the deferred tax assets be reduced by a valuation allowance, if based on the available evidence, it is more likely that not that all or some portion of the recorded deferred tax assets will not be realized in future periods.

          In evaluating the Company’s ability to recover the Company’s deferred tax assets, management considers all available positive and negative evidence including the Company’s past operating results, the existence of cumulative losses and near-term forecasts of future taxable income that is consistent with the plans and estimates management is using to manage the underlying businesses.

          Through June 30, 2009, the Company has recorded a full valuation allowance against the Company’s net operating losses due to uncertainty of their realization as a result of the Company’s earnings history, the number of years the Company’s net operating losses and tax credits can be carried forward, the existence of taxable temporary differences and near-term earnings expectations. The amount of the valuation allowance could decrease if facts and circumstances change that materially increase taxable income prior to the expiration of the loss carryforwards. Any reduction would reduce (increase) the income tax expense (benefit) in the period such determination is made by the Company.

          The Company has adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which provides a comprehensive model for the recognition, measurement, and disclosure in financial statements of uncertain income tax positions that a company has taken or expects to take on a tax return. Under FIN 48, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. The Company has elected to recognize interest expense and penalties related to uncertain tax positions as a component of its provision for income taxes.

          Stock-Based Compensation

          Effective July 1, 2007, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards 123(R) (“SFAS 123(R)”) “Share-Based Payments”. SFAS 123(R) is a revision of SFAS No. 123 and supersedes ABP Opinion No. 25. The Company used the modified prospective transition method and therefore did not have to restate results for prior periods. Under this transition method, stock-based compensation expense for 2007 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, July 1, 2006, based on the grant date fair value estimate in accordance with the original provisions of SFAS 123. Stock-based compensation expense for all stock-based compensation awards granted after July 1, 2006 is based on the grant-date fair

value estimate in accordance with the provisions of SFAS 123(R). The Company will recognize these compensation costs on a straight-line basis over the requisite service period of the award.

          Valuations are based on highly subjective assumptions about the future, including stock price volatility and exercise patterns. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee terminations. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

          Prior to the adoption of SFAS 123(R), the Company accounted for stock-based compensation in accordance with APB No. 25.

          Recently Issued Accounting Standards

          In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, in-process research and development and restructuring costs. In addition, under SFAS 141(R), changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted. The effect of SFAS 141(R) on our consolidated financial statements will be dependent on the nature and terms of any business combinations that we consummate on or after July 1, 2009.

          In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. We do not expect the adoption of SFAS 160 to have a significant impact on our consolidated financial statements unless a future transaction results in a noncontrolling interest in a subsidiary.

          In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits a company to choose to measure many financial instruments and other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing a company with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and, accordingly, we adopted the provisions of this Statement on July 1, 2008. The adoption of SFAS No. 159 did not have a material effect on the financial statements on our consolidated financial statements. However, we do not expect the effect to be significant.

          In February 2008, the FASB issued FSP FAS No. 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS No. 157-2”), that partially deferred the effective date of SFAS No. 157 for one year for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. The Company adopted FSP FAS No. 157-2 on January 1, 2009. See Note 15 — Fair Value of Financial Instruments for additional disclosures required under FSP FAS No. 157-2 for non-financial assets and liabilities recognized or disclosed at fair value in the statements.

          In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. 142-3 will improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FSP No. 141R, and other U.S. generally accepted accounting principles. FSP No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company has adopted this standard as of January 1, 2009. The impact of adopting FSP No. 142-3 is expected to be immaterial to the Company’s Consolidated Financial Statements.

          In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”), which provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 will be effective for interim reporting periods after June 15, 2009. FSP FAS 157-4 does not require disclosures in earlier periods presented for comparative purposes at initial adoption, and, in periods after initial adoption, comparative disclosures are only required for periods ending after initial adoption. The adoption of FSP FAS 157-4 is not expected to have a material impact on the financial condition or results of operations of the Company.

          In April 2009, the FASB issued FSP FAS No. 107-1 and Accounting Principles Board (“APB”) 28-1 (“FSP FAS No. 107-1 and APB No. 28-1”), “Interim Disclosures about Fair Value of Financial Instruments,” which amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” and requires disclosures about the fair value of financial instruments for interim reporting periods of publically traded companies as well as in annual financial statements. FSP FAS No. 107-1 and APB No. 28-1 also amends APB Opinion, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. FSP FAS No. 107-1 and APB No. 28-1 are effective for interim reporting periods ending after June 15, 2009. FSP FAS No. 107-1 and APB No. 28-1 do not require disclosures for earlier periods presented for comparative purposes at initial adoption, and, in periods after initial adoption, comparative disclosures are only required for periods ending after initial adoption.

          In May 2009, the FASB issued FSP FAS No. 165, “Subsequent Events,” which formalizes the recognition and non-recognition of subsequent events and the disclosure requirements not addressed in other generally accepted accounting guidance. This statement is effective for the Company’s financial statements beginning with the annual period ended on June 30, 2009. The adoption of SFAS No. 165 will not have an impact on the financial condition or results of operations of the Company.

          In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which changes the determination of when a variable interest entity (“VIE”) should be consolidated. Under SFAS No. 167, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, as well as the VIE’s purpose and design. This statement is effective for fiscal years beginning after November 15, 2009. We believe the adoption of this pronouncement will not have a material impact on our Consolidated Financial Statements.

          In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162.” SFAS No. 168 states that the FASB Accounting Standards Codification will become the source of authoritative U.S. GAAP recognized by the FASB. Once effective, the Codification’s content will carry the same level of authority, effectively superseding SFAS No. 162. The GAAP hierarchy will be modified to include only two levels of GAAP: authoritative and non-authoritative. This statement will be effective for the Company’s financial statements beginning with the interim period ending September 30, 2009. The adoption of SFAS No. 168 will not impact the financial condition or results of operations of the Company.

ITEM 7A. QUANTITATIVE AND QUALIITATIVE DISCLOSURE ABOUT MARKET RISK

          Market risk represents the risk of loss that may impact our consolidated financial position, results of operations or cash flows. In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates.

          Interest Rate Risk

          The table below provides information about the Company’s financial instruments consisting of fixed interest rate debt obligations. For debt obligations, the table represents principal cash flows and related interest rates by expected maturity dates. (See note 5 of the notes to consolidated financial statements for further information regarding the Company’s debt obligations.)

		Interest
		Rate				2010				2011				2012				2013				Total
Notes Payable — Former JAS Shareholders		Prime				$	250,871															$	250,871
Notes Payable — Biocode Hycel			7	%		$	1,123,840			$	1,404,800			$	1,404,800			$	1,931,607			$	5,865,047

          Currency Fluctuations

          For the years ended June 30, 2009, 2008 and 2007, approximately 19.6%, 13.2% and 12.5%, respectively, of our net revenues were generated in currencies other than the United States dollar. Fluctuations in the value of foreign currencies relative to the United States dollar affect our reported results of operations. If the United States dollar weakens relative to the foreign currency, then our earnings generated in the foreign currency will, in effect, increase when converted into United States dollars and vice versa. Exchange rate differences resulting from the strength or weakness of the United States dollar against the Euro and the United Kingdom Pound Sterling resulted in increases of approximately $323,000, in net revenues in 2009 compared to 2008, $235,000 in net revenues in 2008 compared to 2007 and an increase of approximately $279,000 in net revenues in 2007 compared to 2006. During the three years ended June 30, 2009, no subsidiary was domiciled in a highly inflationary environment and the impact of inflation and changing prices on our net sales and revenues and on loss from continuing operations was not material.

          Conducting an international business inherently involves a number of difficulties, risks, and uncertainties, such as export and trade restrictions, inconsistent and changing regulatory requirements, tariffs and other trade barriers, cultural issues, longer payment cycles, problems in collecting accounts receivable, political instability, local economic downturns, seasonal reductions in business activity in Europe during the traditional summer vacation months, and potentially adverse tax consequences.

          The following table presents foreign revenue as a percentage of total revenue:

		June 30,				June 30,
		2009				2008
Total Foreign Sales		$	15,536,654			$	12,661,554
Total Net Revenues		$	34,467,930			$	29,988,386
International Percentage			45.1	%			42.2	%

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Escalon Medical Corp.
Index to Consolidated Financial Statements

		Page
Report of Independent Registered Public Accounting Firm			40
Consolidated Balance Sheets at June 30, 2009 and 2008			41
Consolidated Statements of Operations for the Years Ended June 30, 2009, 2008 and 2007			42
Consolidated Statements of Shareholders’ Equity and Comprehensive Loss for the Years Ended June 30, 2009, 2008 and 2007			43
Consolidated Statements of Cash Flows for the Years Ended June 30, 2009, 2008 and 2007			44
Notes to Consolidated Financial Statements			46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Escalon Medical Corporation

We have audited the accompanying consolidated balance sheets of Escalon Medical Corp. and Subsidiaries as of June 30, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three-year period ended June 30, 2009. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Escalon Medical Corp. and Subsidiaries as of June 30, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2009 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements for the year ended June 30, 2009 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the commencement of debt payments on the debt related to the Brocode Hycel acquisition and continued losses from operations and negative cash flows from operating activities raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Mayer Hoffman McCann P.C.

Plymouth Meeting, Pennsylvania

October 13, 2009

ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

		June 30,				June 30,
		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	1,810,045			$	3,708,456
Accounts receivable, net			4,853,856				3,896,297
Inventory, net			9,830,922				8,670,160
Other current assets			1,065,823				297,807
Total current assets			17,560,646				16,572,720
Furniture and equipment, net			892,966				1,078,839
Goodwill			2,065,236				11,590,786
Trademarks and trade names			694,006				694,006
Patents, net			1,824,172				157,883
Covenant not to compete and customer list, net			1,880,639				1,691,610
Other assets			137,737				110,176
Total assets		$	25,055,402			$	31,896,020
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	1,374,711			$	501,752
Accounts payable			2,553,481				2,628,004
Accrued expenses			2,919,540				2,895,920
Total current liabilities			6,847,732				6,025,676
Long-term debt, net of current portion			4,741,207				250,871
Accrued post-retirement benefits			1,027,821				1,087,000
Total long-term liabilities			5,769,028				1,337,871
Total liabilities			12,616,760				7,363,547
Shareholders’ equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued
Common stock, $0.001 par value; 35,000,000 shares authorized; 7,413,930 and 6,413,930 issued and outstanding at June 30, 2009 and June 30, 2008, respectively			7,526				6,526
Common stock warrants			1,733,460				1,601,346
Additional paid-in capital			67,458,745				66,299,130
Accumulated deficit			(56,232,503	)			(43,267,466	)
Accumulated other comprehensive (loss)			(528,586	)			(107,063	)
Total shareholders’ equity			12,438,642				24,532,473
Total liabilities and shareholders’ equity		$	25,055,402			$	31,896,020

See notes to consolidated financial statements

ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended June 30,		2009				2008				2007
Net revenues:
Product revenue		$	34,467,930			$	29,988,386			$	27,892,738
Other revenue			132,807				222,075				10,945,042
Revenues, net			34,600,737				30,210,461				38,837,780
Costs and expenses:
Cost of goods sold			19,548,209				17,309,671				15,771,254
Marketing, general and administrative			14,846,502				14,392,004				13,806,399
Research and development			3,474,284				4,058,289				3,461,322
Goodwill impairment			9,525,550				9,574,655				0
Total costs and expenses			47,394,545				45,334,619				33,038,975
Income (loss) from operations			(12,793,808	)			(15,124,158	)			5,798,805
Other (expense) and income:
Gain on sale of assets			91,871				0				75,000
Equity in Ocular Telehealth Management, LLC			(65,387	)			(88,206	)			(87,852	)
Interest income			18,562				299,538				208,457
Interest expense			(216,274	)			(11,827	)			(28,753	)
Total other income			(171,228	)			199,505				166,852
Net income (loss) before taxes			(12,965,036	)			(14,924,653	)			5,965,657
Provision for income taxes			0				134,990				51,054
Net income (loss)		$	(12,965,036	)		$	(15,059,643	)		$	5,914,603
Basic net income (loss) per share		$	(1.82	)		$	(2.36	)		$	0.93
Diluted net income (loss) per share		$	(1.82	)		$	(2.36	)		$	0.92
Weighted average shares — basic			7,137,541				6,389,008				6,374,929
Weighted average shares — diluted			7,137,541				6,389,008				6,434,275

See notes to consolidated financial statements

ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED JUNE 30, 2009, 2008 and 2007

																						Accumulated
										Common				Additional								Other				Total
		Common Stock								Stock				Paid-in				Accumulated				Comprehensive				Shareholders’
		Shares				Amount				Warrants				Capital				Deficit				Income (Loss)				Equity
BALANCE AT JUNE 30, 2006			6,457,157			$	6,457			$	1,601,346			$	65,699,258			$	(34,122,427	)		$	(84,527	)		$	33,100,107
Comprehensive Income (Loss):
Net income			—				—				—				—				5,914,603				—				5,914,603
Change in unrealized gains on available for sale securities			—				—				—				—				—				(50,220	)			(50,220	)
Foreign currency translation			—				—				—				—				—				95,394				95,394
Total comprehensive income			—				—				—				—				5,914,603				45,174				5,959,777
Exercise of stock options			42,200				42				—				84,692				—				—				84,734
Compensation expense			—				—				—				162,576				—				—				162,576
Income tax benefit from exercise of stock options			—				—				—				98,412				—				—				98,412
BALANCE AT JUNE 30, 2007			6,499,357			$	6,499			$	1,601,346			$	66,044,938			$	(28,207,824	)		$	(39,353	)		$	39,405,606
Comprehensive Income (Loss):
Net loss			—				—				—				—				(15,059,643	)			—				(15,059,643	)
Foreign currency translation			—				—				—				—				—				(67,710	)			(67,710	)
Total comprehensive loss			—				—				—				—				(15,059,643	)			(67,710	)			(15,127,353	)
Exercise of stock options			27,073				27				—				7,435				—				—				7,462
Compensation expense			—				—				—				246,757				—				—				246,757
BALANCE AT JUNE 30, 2008			6,526,430				6,526				1,601,346				66,299,130				(43,267,466	)			(107,063	)		$	24,532,472
Issuance of common stock			1,000,000				1,000				—				895,886				—				—				896,886
Issuance of warrants			—				—				132,114				—				—				—				132,114
Comprehensive Income (Loss):
Net loss			—				—				—				—				(12,965,036	)			—				(12,965,036	)
Foreign currency translation			—				—				—				—				—				(421,523	)			(421,523	)
Total comprehensive loss																			(12,965,036	)			(421,523	)			(13,386,559	)
Compensation expense			—				—				—			$	263,729				—				—				263,729
BALANCE AT JUNE 30, 2009			7,526,430			$	7,526			$	1,733,460			$	67,458,745			$	(56,232,503	)		$	(528,586	)		$	12,438,642